The main stock index is down 55% in four months, banks are starved for capital and teetering on the brink, the currency is at a one-year low and the government is throwing money at the problem. We're not talking about Wall Street.

The current carnage on Russian markets comes amid global market turmoil. But the dive in Moscow began before the wider world cared about AIG's balance sheet, and its chief causes are home-grown. To wit, the bill for eight years of Putinism is coming due. And a Kremlin leadership that only weeks ago brimmed with menacing self-confidence is struggling to slow this financial free fall.


The first sign of trouble came in late July when Prime Minister Vladimir Putin lashed out at a Russian coal and steel company, Mechel, for alleged price gouging and appeared to threaten personally its chief executive. Mechel shares fell by a third, and the incident sent a chill through the market as a whole. Investors woke up to the systemic risk to property rights and the lack of any rule of law in Russia. They did so belatedly, we'd add, considering the attempted or successful expropriation of Yukos, BP and Shell assets and the blatant use of state resources to menace private business.

Another trigger was last month's war in the Caucasus. The Russians routed the Georgian army in four days and annexed -- in all but name -- its provinces of South Ossetia and Abkhazia. Then Russia got routed by the global economy. Since the war started, investors have pulled more than $35 billion from Russian markets. Russian businesses are having trouble getting access to international financial markets, as foreign lenders wonder if they can get paid back. Some $45 billion in foreign debt held by Russian corporates must be refinanced by the end of the year, and the cost of doing so is rising.

Other emerging markets have been hit hard in recent weeks, particularly the natural resource-driven economies. But Russia's is the worst performing market in the world this year. The decline from the all-time high in May wiped out $680 billion in value; Russia's entire GDP was just $1,286 billion as of last year. On Tuesday, the main ruble-denominated index was off 11.2%, the steepest fall since the 1998 ruble crisis. It plummeted yesterday as well, before regulators stopped trading for good at midday.

Each of the past three days, the Russian central bank injected over $10 billion into the money market, and also moved to prop up the ruble. The Kremlin yesterday lent the country's three largest banks $44.9 billion. Thanks to the oil and gas windfall of the past few years, Russia has built up a $573 billion reserve war chest that can tide the financial system over for a while and avoid a rerun of the 1998 crisis.

Not forever, especially if oil prices continue their fall. Russia's economy is hugely dependent on natural resources. In good times, the Kremlin pocketed the billions and didn't worry about pushing economic reforms. The outside investment needed to diversify was discouraged by the Kremlin's backsliding on the rule of law. Now the drop in crude prices is squeezing the country's blue chips and the Kremlin's coffers, even though on the current budget the Russian state will break even with oil at $70 a barrel or above.

Long reluctant to criticize the thin-skinned Putin regime, businesses have started to voice their unhappiness. On Monday Putin sidekick and President Dmitry Medvedev hosted 50 leading businessman at the Kremlin, and acknowledged that the Georgia war contributed to the country's economic troubles. He said Russia didn't want to be isolated, but added, "If they" -- meaning the West -- "try to stop us accessing certain markets there will be no catastrophe for the state or for those sitting here."

As it has turned out, much faster than anyone realized or hoped during the Georgian war in August, Western governments haven't had to do anything to have Russia pay a price for its aggressive behavior. Which is fortunate, considering the weak stomachs in Europe and at the State Department for any serious response to the war. Investors did it for them.

The war has also exposed the fiction that Russia is the next China -- an authoritarian political regime that's stable, predictable and on a path toward becoming a free-market economy. It's authoritarian all right, but it lags China on other counts. After this war, Russia is unlikely to join China in the World Trade Organization. Georgia and Ukraine, another potential target for Russian aggression, are in that club and in a position to block entry. But the bigger hurdle ought to be the WTO's standard that candidates be "market-based" economies ready to respect the commitments and rules of this international organization. By this standard, Russia doesn't belong there, or in the OECD or G-8.

Perhaps the Russian people, who give their leaders high marks in opinion polls, will begin to see the economic toll from Putinism and question whether their country is well-served by this leadership.

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