Could It Happen to the Russian Bear?

Capital flight is a terrible thing. It happened to Iceland in Iceland Melts, 77% Single Day Drop. In Iceland: What Happens After Imploding? the immediate consequences become apparent. They are not pretty.

Could it happen to the great Russian Bear too?

Ruble Devaluation Concern Triggers Stock Plunge, Rate Increase: “Russia's ruble fell the most in two months as the central bank loosed its defense of the currency amid the country's worst financial crisis since the 1998 devaluation.

Bank Rossii widened its range on the ruble against a basket of dollars and euros by 30 kopeks (1 cent) to increase the currency's “flexibility” and lifted its benchmark refinancing rate to 12 percent from 11 percent to arrest outflows, according to separate statements after the stock market closed. The Micex Index plunged 13 percent, the biggest decline worldwide, and won't open tomorrow, spokeswoman Anna Cheryomushkina said.

“They're going to move the line in the sand back a little bit, where they hope they can defend it,” while resisting a formal devaluation that would erode confidence in ruble deposits, Chris Weafer, chief strategist at UralSib Financial Corp. in Moscow, said in an interview today. “If people start to lose confidence in the banking system, we could have a massive run on the banks as we saw twice in the nineties, and then the game is up.”

Russia drained 19 percent of its currency reserves to stem a 17 percent slide in the ruble against the dollar since the start of August, prompting warnings of possible downgrades from Fitch Ratings and Standard & Poor's. Financial turmoil has forced the country's largest oil and steel producers to seek tax breaks, while the defense industry is failing to meet government orders.”