Ed Bentley
The debt crisis in Dubai last week gave a stark warning that emerging economies are not yet home and dry from the crisis.
Russia's dollar-denominated RTS fell 100 points over 5 days as investors rushed away from Moscow's bourses and risky assets.
"The oil price closed lower by around 2.5 per cent at $76.1/bbl, as the Dubai debt crisis drove investors into the safety of the dollar," wrote Tom Mundy, an equities analyst at Renaissance Capital.
Shares stabilised on Friday as fears eased that Dubai World's request to delay interest payments on its $59 billion debt mountain would cause a run on banks and local lenders, but investors still expect some knock on effects.
"The regional Central Banks are expected to also ensure only limited contagion to other countries," UralSib's chief strategist Chris Weafer wrote in a note to investors. "The big property developers and companies like Dubai World will, however, still face defaults."
Despite the fallout from the crisis little more than a year ago, there is concern that the model of debt-heavy capitalism exemplified by Dubai has failed to change and companies are producing beyond their means.
"When your system is so fragile it doesn't take much to bring it down, and this shock has demonstrated that," said Ivan Ivanchenko, an analyst at VTB Capital.
Some fear that defaults could spark a domino effect surging round emerging markets if investors lose confidence and continue moving their money back to safer shores.
"If we see first redemptions in the market, then normally in a momentum-driven market, you just need the first wave - then it'll become self-fulfilling," said Ivanchenko. "I really believe that we have seen the highest for the year in Russia."
The United Arab Emirates central bank has pledged emergency support to any foreign or local bank facing losses or default, and while this has eased investors' immediate worries, the long term problems for indebted businesses and companies remain.
"Just transferring your mess from private books to public books doesn't solve the problem," said Ivanchenko. "To solve the problem you have to solve the core reason, and that is excessive credit."
Investors also remain concerned over the lack of clear information regarding the situation in Dubai, with the discussions between the key players taking place in secret.
While the news flow and investors' actions are likely to focus on the unfolding problems in the Middle East, Putin's question-and-answer session reset for December 3 is likely to shed more light on Russia's economic situation.
