Markets Tumble on War Fears

Worries over Russia's involvement in the escalating conflict in South Ossetia sent Moscow stock markets tumbling Friday.

The benchmark RTS Index dropped 6.5 percent to 1723.32 points, while the ruble-denominated MICEX fell 4.9 percent to 1,365.26 points, as of 5:20 p.m.

The worst-hit Russian stock was Inter RAO, a power generator with plants in Georgia, which lost one-quarter of its value in Moscow trading Friday after Georgia said Russian warplanes bombed two Georgian towns.

Inter RAO, which first listed its shares last month, fell 2.06 kopeks, or 25 percent, to 6.06 kopeks on the MICEX exchange, Bloomberg reported.

For weeks, Russian stock indexes have been hit by a double whammy of global factors such as sliding oil prices and the continuing global credit crunch, and domestic factors such as investors' fears over the TNK-BP shareholder dispute and an anti-monopoly crackdown aimed at coal and steel firm Mechel.

Analysts said the possibility of a war with Georgia was the last thing Russian stocks needed, amid other troubles.

"There has been a large-scale outflow of capital which seriously weakened the ruble, forcing the Central Bank of Russia to lend 127 billion rubles to banks on Friday," said Anton Strouchenevsky, chief economist at Troika Dialog. "War-related political risk always scares investors away from the domestic markets more than any business-associated risk."

Chris Weafer, chief strategist at UralSib, said the negative sentiment created by the escalation of the conflict with Georgia would hit Russia-focused funds.

"Unless the current conflict is resolved soon then we will see many more global funds abandoning ship in Russia in favor of less risky, less complicated investment stories elsewhere," Weafer said in e-mailed comments Friday.

"The 'economic predictability' side of the investment case has already started to attract doubts with investment slowing, industrial inflation rising and the slowing price of oil. Now the 'political stability' platform is also starting to be questioned."

A fairly quick resolution to the fighting would enable Russian assets to trade at a 20 percent to 25 percent discount to the emerging-markets average, implying an RTS level of about 2,000, Weafer said, but he added that it would be "very many months before investors will pay much more."

Prolonged involvement in the South Ossetian conflict could put Russian assets at risk and could put downward pressure on the ruble, analysts said.

"We particularly expect a decline in the ruble and widening of [credit default swap] spreads, which is likely to apply pressure to Russian stocks and bonds," said Alexei Moisseyev, head of fixed income research and economics at Renaissance Capital. "However, we think that, with fundamentals remaining solid, any sell-off is likely to be reversed in a matter of days and weeks, with the timing dependent on the scale of Russian involvement."