Pussy Riot's Guilty Verdict Spooked Investors, But Gu Kailai's Won't

Agenda-Setting Financial Insight.
Aug. 20 2012 7:25 PM

Pussy Riot's Guilty Verdict Spooked Investors, But Gu Kailai's Won't

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Policemen stand guard outside the Intermediate People's Court in Hefei during theGu Kailai trial.

Photo by PETER PARKS/AFP/GettyImages

China’s hurried murder conviction for politician’s wife Gu Kailai and Russia’s imprisonment of punk protesters Pussy Riot were both slightly farcical and deeply symbolic. The guilty verdicts were the same, but investors are likely to draw different conclusions.

Gu’s brief trial, which ended in a suspended death sentence on Monday, was untransparent and widely judged to be political. Did she really pour poison down the throat of former family friend Neil Heywood in a prolonged fit of insane rage? It matters less than the future of her husband, former political high-flyer Bo Xilai. Bo’s rivals may have used the murder trial as a convenient excuse to discredit his economic experiments and public grandstanding.

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If so, Gu’s conviction looks like a victory for stability at the top of the ruling Chinese Communist Party, at least in the short term. The tough sentence on Gu pretty much stifles Bo’s political ambitions, even if the former leader of Chongqing receives no punishments beyond the loss of his party posts. A smooth transition to the next generation of leaders looks more likely.

Investors will be relieved. They are more concerned with the maintenance of political calm in China than with the establishment of a solid rule of law. That is a worry for another time.

In Russia, it’s different. The low quality of the legal system is a big and current investor concern, as are the autocratic tendencies of President Vladimir Putin. Friday’s two-year prison sentences for three members of Pussy Riot will reinforce the worries. The protester-singers were convicted of hooliganism for interrupting a church service with an anti-Putin performance. The harsh penalty shows that it is dangerous to cross Putin in any domain.

Financial flows show what investors think. Yes, China’s foreign investment has levelled off since 2011, but at around $114 billion over the past twelve months, according to Credit Suisse, it is still close to the highest in a decade. Russia, on the other hand, saw capital outflows of around $81 billion in 2011, twice the previous year’s figure. The courts have pronounced, but the markets judge for themselves.

Read more at Reuters Breakingviews.

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