Russia and its problems may seem remote to most of us why, it is not even playing in the soccer World Cup, but as it tries to tie up emergency funding with the IMF, its crisis could be more important for the rest of Europe, and for investment markets, than we think. It depends, though, on whom you believe.
"No, Russia is not Europe's Thailand," declares Mr Brian Mullaney, at HSBC Securities. Russian contagion will definitely not prove as virulent as the Asian phenomenon.
But Mr Martin Armstrong, at Princeton Economics, warns that an imminent Russian economic collapse is a bigger threat to the rest of Europe than the Asian slump. "The real crisis is in Russia," he insists.
Or is it? Mr Francois LangladeDemoyen, at Credit Suisse First Boston, even manages to find an optimistic angle. He says Russian turmoil and the associated capital flight "may well prove to be positive for European equity markets".
Certainly, the main continental European stock markets have flourished in recent months, even taking over the bull market's baton from Wall Street. With the first half of 1998 over, the Europe ex-UK index is up 30 per cent, compared with 16 per cent for the US. The Pacific Basin index has fallen a further 12 per cent during the six months.
Indonesia ranks as the weakest stock market in dollar terms this year, but Russia's index decline of 59 per cent is scarcely better. Russia has escaped an Asian-style banking collapse, but it shares problems of rampant corruption and dependence on a shaky currency peg to the dollar. The latter has exposed Russia to the ill-effects of a collapse in the oil price (which might better be viewed as a rise in the dollar), and the country's oil barons are said to want a big devaluation to restore profitability.
Devaluation is ruled out officially, though, because it would frighten the foreigners who provide almost a third of the government's $60 billion (£43 billion) of short-term finance. Although overall indebtedness is not high, its average term is very short and the government has to roll over an average of 8 billion roubles each week which is why it hoisted interest rates temporarily to an annualised 150 per cent, at one stage last month.
A devaluation, incidentally, would also ruin the financial institutions which live dangerously off the speculative spread between dollar rates of 6 per cent and rouble rates roughly 10 times as high. But the rouble seems doomed, anyway.
Right now, Russian consumer price inflation is only about 7.5 per cent, but there is a recent history of hyperinflation and the rouble might go into free fall if confidence collapsed. Although the International Monetary Fund agreed to release another $670 million in short-term support on Thursday, a mooted $15 billion package remains stalled; the IMF does not want to finance another round of capital flight, which has been running at $20 billion a year although flowing more probably into dollar cash and bonds than European stocks.
Such a shaky financial set-up can perhaps be held together in favourable times, when global investors have made money on some good bets and are willing to punt their winnings in other high-risk areas. Easy come, easy go; but stock market investors have faced the problem that while corporate Russia may have to wait years before they lose their third world characteristics the stock market fell 39 per cent in May alone.
Is Europe threatened? The trade impact of a Russian meltdown would be serious for some east European countries for which Russia, on average, accounts for a tenth of exports. Western Europe's involvement is fairly negligible, however, except for Germany where Russia represents about 5.5 per cent of overall trade. Germany also is the most heavily involved financially, with some $30 billion lent to Russia. These economic and financial hazards look containable. Regardless, Germany's DAX index has been hitting all-time highs this week. The political risks are more worrying, though: it could turn out that we are only a Boris Yeltsin heartbeat away from the collapse of the economic reform process.
The Americans are busy with trouble spots elsewhere. Having diplomatically lost at soccer to Iran, they are now wooing China and addressing the problems in Asia, which is so much more important to them than Russia.
Within the past week or so, it has appeared that safe-haven flows into the dollar have strengthened, helping to send Wall Street sharply higher despite the imminence of a poor second-quarter corporate reporting season.
Europe's bull market is intact, but it has very much depended on flows from the US, with American investors convinced that sluggish Europe might somehow embrace US-style restructuring. If more Americans come to perceive, like Mr Armstrong, that western Europe is threatened on its doorstep by a kind of Indonesia bristling with nuclear weapons, they might take their money home, or perhaps send it back to a restabilised Asia.
Those suitcases stuffed with Russian mafia dollars are unlikely to provide an adequate substitute, bulging though they are reliably said to be.
