The past few weeks cannot have been good for Mr. Putin’s inflated ego. It seems like Russia’s quest to be the world’s next powerhouse has lost some momentum. Mr. Putin is in good company; all countries contending for a spot atop the economic food chain have taken a fumble. China (NYSEarca: FXI) is off nearly 50% for the year and we are well aware of our domestic issues.

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What happened?

Two free-fall sessions on Tuesday and Wednesday lead to suspended trading for Moscow’s largest stock exchange (MICEX) and the dollar-denominated rival exchange RTS. RTS has given up over 60% of its value since its May peak of 2487. Somebody may want to alert Russia to America’s “bigger is better” motto does not apply to losses.

Nails in the coffin:

There are numerous facets that contributed to Russia’s equity slaughter. It started out with Putin’s public attack of steel maker OAO Mechel (NYSE: MTL) over price-gouging and alleged tax dodging.
The cold shoulder which Russia turned to TNK BP (a joint venture of BP and Russian investors) resulted in the American CEOs departure from Russia and further compounded concerns about Russia’s market system (or lack thereof).

The nail in the coffin proved to be falling oil prices. A 35% fall in oil prices (AMEX: USO) is too much to handle for an economy that still heavily depends on oil and other commodities. A quick glance at the chart below reveals that the Russia ETFs (NYSEarca: RSX) performance parallels the decline of oil.

As often happens in times of market panic, the collapse has been self-reinforcing. Margin calls could only be met by selling more stocks to raise cash, creating an unstoppable vicious circle.

Of course, the president insists that the stock market slump does not reflect the objective state of the economy. “The Russian stock market remains very promising for investments, and serious investors understand this” he concluded.

A sinking submarine:

If our own President Bush’s statements about the U. S. economy (“everything is fine, there is no recession”) are any indication about the accuracy of Mr. Medvedev’s statements about Russia’s economy, watch out and buckle up.

The global economy is much like a leaking submarine. It started out with a crack a year ago. The weight of the water causes the submarine to sink further, causing additional pressure, creating more leaks, sinking the submarine further. This is a vicious cycle with no stop-loss provision.

The fate of Russia’s economy is inevitably connected to the price of oil which is connected to the health of the global economy. Oil doesn’t do much good to a sinking submarine.

The article would be incomplete if we omitted that the Dow Jones rallied 30% after the U.S. markets were halted due to 9/11. Extreme levels of fear have the propensity to serve as a spring board for rallies of varying degrees.

ETFs with Russia exposure: