Moscow subway explosions: a blip of terrorism or long-term economic drag?

The terrorism behind the Moscow subway explosions could become an economic drag if it changes perceptions of security risks in Russia.

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    An Emergency Ministry officer uses a mobile phone in downtown Moscow Monday after two Moscow subway explosions, which officials linked to terrorists. The twin blasts caused at least 38 fatalities and could turn into an economic drag on Russia if it signals the start of a sustained terrorism campaign.
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The Moscow subway explosions will have a short-term economic impact as Russia's capital city recovers from the twin suicide bombings, which caused at least 38 fatalities.

The long-term economic impact of the terrorist bombings depends crucially on what happens next and how the Russian public interprets it.

If Russian authorities can prevent further attacks, then Monday's bombings will probably not cause much of a blip in Russia's economy. If, however, the explosions mark the beginning of a long terrorist campaign, that could dampen Russia's economic growth, research shows.

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"There is quite a lot of evidence that terrorist attacks affect economic activity, but in particular ways," says Alberto Abadie, a public policy professor at Harvard's Kennedy School of Government in Cambridge, Mass. The key is public perception, he adds.

The bombings were timed for maximum impact: during Monday's morning rush hour at two subway stations in central Moscow. First hit was central Lubyanka station, beneath the headquarters of the Federal Security Service (the successor to the KGB). Then another bomb went off in nearby Park Kultury station. Both stations were transfer points to other subway lines.

By themselves, Monday's attacks are unlikely to change security perceptions. The Moscow subway system, one of the world's largest, has been attacked before: four times since 2000. Both subway stations were open again by the evening rush hour, according to news reports.

There also appears to be a law of diminishing returns to these attacks. The 2004 bombing in the Madrid subway, which caused 191 fatalities, caused America's Standard & Poor's 500 index to fall 1.5 percent that day. When the London subway bombing occurred the following year, the index actually rose a little. On Monday, the S&P was up slightly.

Even Moscow's stock index – the MICEX – rose on Monday and the ruble stayed stable.

Sometimes, a single dramatic terrorist event can throw economies for a loop. The 9/11 terror attacks punctured America's sense of domestic security in a single day. Nevertheless, a year after the attacks, the US economy was growing again. For example, five years after the attacks, security concerns in Chicago about the terrorist threat to its skyscrapers was beginning to recede. Office vacancy rates in the immediate vicinity of its three tallest buildings, which had nearly doubled in comparison with other downtown offices, were falling again, according to a study by Professor Abadie and coauthor Sofia Dermisi.

By contrast, a sustained low-level terror campaign can raise long-term security concerns and hurt economic growth, Abadie says. Two decades of Basque terrorist activity in Spain, for example, caused far fewer fatalities than 9/11 but created a 10 percent drop in per capita gross domestic product in that area of Spain, according to Abadie's research. One reason: The more intense the level of terrorism, the more foreign direct investment falls.

The question for Russia is what Monday's bombings signal: a one-off event or the beginning of a long campaign.

Perceptions will play a key role, Abadie says. "What is going to happen ... depends on how people are going to interpret it."

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