MICEX Falls 9% After Tax Flip-Flop

Russian markets plummeted to a two-year low Monday as the MICEX fell 9.1 percent and the RTS 7.5 percent, in a sell-off that investors and analysts said was driven by fear.

The ruble-denominated MICEX sank to 1,158.07 points, its lowest level since June 14, 2006, while the dollar-denominated RTS sank to 1,395.11 points, bringing its fall to 39 percent this quarter.

The ruble fell 0.4 percent to 25.63 against the dollar, a one-year low, as U.S. oil prices fell 2 percent to a five-month low.

An already bad day for Russian markets was compounded by midafternoon comments by Finance Minister Alexei Kudrin, who sparked a further tumble by saying there should be no further tax cuts for the oil industry.

His comments threw the markets into some disarray, coming just three days after the Energy Ministry said it would propose an easing of the tax burden on oil firms.

James Fenkner, director at Red Star Asset Management, said "about half" the sell-off was down to Kudrin's comments and that the entire market had been "caught long."

"We're definitely in a death spiral," he said, referring to a situation where withdrawals from investment funds lead to forced selling. "It's the Real McCoy."

Fenkner said the day's sell-off was "all based on fear," and suggested that someone in authority might soon "start tapping folks on the shoulder, saying, 'Buy.'"

Oil stocks fell sharply on Kudrin's comments, with Rosneft ending the day down 9.6 percent -- its biggest fall since its stock market debut in 2006 -- and LUKoil falling 8.8 percent on the MICEX.

The worst fall among blue chips was suffered by Norilsk Nickel, which was down 13.3 percent at the close on the MICEX, after being down 16 percent earlier in the day. Norilsk's stock has taken a beating in recent months over falling nickel prices and concerns over a boardroom struggle for control at the miner between Vladimir Potanin's Interros and Oleg Deripaska's United Company RusAl.

Banking stocks, which enjoyed some respite Monday after the nationalization of Fannie Mae and Freddie Mac in the United States, fell back into crisis mode Tuesday, with Sberbank falling 9.7 percent and VTB down 9.5 percent on the MICEX.

RTS chairman Roman Goryunov sought to reassure investors, saying there were "no serious reasons why the market should collapse."

"Stocks are increasingly undervalued now, which may act as a signal for investors that they can buy cheaply into the assets they find attractive," Goryunov said in televised comments at a party for the RTS's 13th anniversary Tuesday evening.

Ivan Mazarov, portfolio manager at Prosperity Capital Management, which manages some $5 billion in Russian assets, said investors should expect Kudrin, a fiscal hawk, to safeguard the government's war chest against lower taxes.

"Valuations are extremely low," Mazarov said, adding that the market would rebound "across the board."

Erik de Poy, equities strategist at Alfa Bank, said Monday's decline showed that investors were "selling first, asking question later."

While the final word on oil tax cuts would come from "a higher level than Kudrin ... now is not the time to jerk around the market."

Viktor Mishnyakov, oil and gas analyst at UralSib, said oil tax cuts on a larger scale were necessary for the long-term development of the country's oil industry.

"Unless the formula for the mineral extraction tax is changed as the oil firms have proposed, their long-term production projects in eastern Siberia will be threatened," Mishnyakov said.

Russian markets were set to open Wednesday to further bad news from the United States, where shares in Lehman Brothers fell as much as 43 percent as talks collapsed on the U.S. investment bank raising capital through the sale of a stake