Enjoy the Natural Phenomenon
Editorial
Illustration: Sergey Zheglo
Russian stock markets have shown slight growth this past year: the RTS dollar index increased by 20%, just barely above the inflation of the ruble. There is a wide range of predictions for the upcoming year, but even confirmed optimists are not taking it upon themselves to predict more than 40% growth. The end of the 2005-2006 energy rally deterred the non-professional section of the public from funds market speculation, and the influx of private moneys into mutual funds dropped sharply. A full-scale bubble on the Russian resources market also did not have time to form fully, which is witnessed by the results of our statistical analysis and supported by professional players on the market. This is for the best.
Even without the abovementioned factors, the Russian funds market can be faulted for the fact that it is not attached firmly enough to the growth mechanism of our economy. It has not yet become a true funds market on which companies attract capital for their long-term investment projects. As before, Russian companies prefer to turn to the West for capital. Therefore, it is at least fortunate that the funds market has not become a negative factor for Russian companies, which is what certainly would have happened if a real bubble had formed.
In one sense, we might even propose that a real funds bubble could not have developed under current conditions in Russia. History shows us that, in order for that to happen, investors have to succumb to a kind of hysteria over the brilliant promise of the new industries that have arrived on the market. No new industries of any worldwide importance have so far been seen in Russia. There is also no real region for there to be any kind of craze over the raw materials sector; for that, something completely out of the ordinary would have to happen, like the release of new data indicating that there are only five years left until we run out of oil.
Nevertheless, a discussion on the events on the Russian funds market did take place. Is this a bubble or not? Many people were working on the question. Because of this, it was also impossible to circumvent the problem of the probable interference of economic authorities in the work of the resources markets. Should the authorities prevent the expansion of the funds bubble, and even of the resources bubble? This nearly philosophical question has been occupying the minds of the economists and politicians of many developed countries for at least the last two decades.
As usual, opinions have been all over the map. The Europeans, who advocate moderation in all things, are more inclined to consider the bubble an evil against which battle must be joined – preferably using a preemptive strike. The Americans have a broader view of the problem. It is well known that in his post as head of the Federal Reserve, Alan Greenspan was the principal opponent of a fight against the expansion of bubbles. His position is similar to ours. It is actually quite difficult to tell in real time whether a bubble is forming or a new, promising industry is being born. Sometimes even decades after the event has taken place, economists continue discussing what really happened that year. It is therefore not realistic to expect an exact and unbiased real-time diagnosis of the situation.
In interfering, the authorities always risk destroying a new wave of investments or a new innovative direction, or simply cutting off a rising business cycle, instead of preventing a bubble as intended.
Here is a not-quite-accurate analogy: if politicians in the mid-twentieth century had thought too much about what a terrible thing nuclear energy is, humanity might not have reaped its benefits. The wave of industrial growth, fed by the energy of urbanization and huge wars, was ending by time, and it is not clear how people would have approached a solution to this problem.
Economic development is first and foremost a natural phenomenon. It is vast from a macroeconomic point of view, and it can definitely not be managed by the use of macroeconomic instruments; at least, the macroeconomic interference of the government all too often leads to different results than those planned. Credit rates could possibly be raised in order to combat the expansion of a bubble, but it could turn out that the bubble forms anyhow, and the increase in the cost of credit hits other, older industries, in which intense domestic and foreign competition and low profit margins cause businesses to rely more heavily on the accessibility of credit.
The bubble question is the place where macro- and microeconomic analysis meet. Can the government draw conclusions on the lack of promise of the many investment plans of private players on the basis of rather general economic indicators, or should it give these investors the chance to try their plans out on the market?
