Markets Endure Trio Of Troubling Events

Russian markets endured a turbulent week, as stocks of major companies faced a triple assault amid worries over fighting in Georgia, anti-monopoly measures against Mechel and the seemingly never-ending TNK-BP saga.

After the big Georgia-induced sell-off on Aug. 8, stocks enjoyed a shaky recovery after President Dmitry Medvedev signaled that Russian forces would observe a cease-fire and pull out of Georgia proper, despite media reports suggesting the contrary.

The dollar-denominated RTS Index ended the week up 3.5 percent at 1,785.36 points, despite falling 0.6 percent Friday, while the ruble-denominated MICEX Index rose 7.4 percent on the week and 1.1 percent on Friday.

Other news unrelated to the war also made investors jumpy, with a demand by Federal Anti-Monopoly Service chief Igor Artemyev that Mechel cut its coking coal prices and switch to long-term contracts prompting fears of increased government regulation in the sector.

Also Thursday, a Moscow court's two-year ban on TNK-BP chief executive Robert Dudley dampened investor sentiment, as Dudley said he saw BP's billionaire partners behind the ruling.

"In isolation, none of these events are surprising, nor do any of them have a material effect on the investment case [for Russia]," UralSib said in a note to investors Friday. "But collectively they add further pressure onto an already deteriorating investment case and make the decision to stay away from the market until the 'dust settles' that much easier."

Some analysts said, however, that the bad news flow made it a good time to invest in the country.

"Investors should buy even in the likelihood of U.S. imposing sanctions — economic or financial — on Russia," said Ronald Smith, chief strategist at Alfa Bank. "The U.S. cannot do much to directly affect the Russian economy or the earnings of Russian companies."

Smith predicted that the political risk would dissipate quickly.

"Once many funds are underweight, it will be possible for investors to ramp up their interest again in the country and deploy funds back to a very cheap Russian market," Smith said.

Tom Mundy, an equity strategist at Renaissance Capital, said the oil price was arguably more of a driver for the market than perceptions of political risk.

Gazprom, LUKoil and Rosneft, which among them account for a 52 percent weighting in MSCI Russia Index, have lost 28 percent, 30 percent and 25 percent, respectively, as oil has sold off.

Mundy said the ruble, which fell last week on fears of Georgia-related instability, would rebound, benefiting from the cessation of hostilities and upcoming tax payments, resulting in an additional demand for rubles.

"We are also looking for further tightening of the credit default swap spreads to pre-conflict levels," Mundy said.

Amid nervousness over the Georgia conflict, Russia registered fund outflows of $239 million in the week to Wednesday, according to EPFR Global.

Russia has seen $725 million withdrawn from funds since July 1, after a net inflow of just over $3 billion in the first half of the year.