Russian shares plunge

Russia's economy has grown at an impressive rate--at an average of 7 percent in the past 8 years--on the back of cheap loans, a rapidly growing consumer economy and the high inflow of foreign investment.

But now years of easy money are at an end, and domestic growth is slowing. Capital markets abroad have seized up, and the Kremlin has been forced to resort to far-reaching measures to persuade domestic banks to start lending to one another again. Added to the mix, Russia is facing soaring inflation--which analysts predict could easily reach 15 percent this year.

Vladimir Putin--who presided over Russia's eight-year oil-fueled boom--can attribute much of his popularity to a robust economy, which led Finance Minister Alexei Kudrin to describe Russia as a "haven of stability."

While the gap between rich and poor remains huge, Russia's daily flood of so-called petro dollars has recently begun to filter down to the country's lower-income citizens.

Oil remains the backbone of the economy. Through windfall oil profits, Russia has hoarded budget surpluses totalling some $188.7 billion--and has stashed away some $140 billion of that in a reserve fund.

Chris Weafer, chief strategist at UralSib, estimates the country pulls in approximately $1 billion a day when oil sits at around $100 a barrel. But with the price of Urals crude now down in the low-$80s, growth looks perilous indeed.

Kudrin said last week growth could reach 5.7 percent next year--down from the 6.7 percent it previously forecast. That outlook could become much gloomier should the international financial crisis continue.

"The current level of the RTS implies an oil price of $50 a barrel," said Weafer in a note to investors. "That is $20 a barrel below the critical level for the federal budget. At that level all bets are off in terms of the investment case for Russia."

Should oil plummet to $50 a barrel, UralSib estimates that growth could tank to 3.4 percent in 2009--a substantial drop from the 7.8 percent the government is still hoping to achieve this year.

Martin Gilman, the IMF's former representative in Russia, is less convinced of upcoming economic hardship.