Nervous Investors Rattled by Lehman

ReutersA woman entering the Moscow Interbank Currency Exchange on Monday.
The markets took another hit Monday as grim economic news from the United States and a fall in crude oil prices sent banking and energy shares tumbling once again, after they had staged something of a recovery on Friday.

The news that Lehman Brothers had filed for bankruptcy and fellow Wall Street giant Merrill Lynch was being bought out by Bank of America hit banking stocks hard, with VTB ending the day's trading down 10.2 percent on the MICEX Index and Sberbank falling by 6.2 percent.

Damage to oil installations in the Gulf of Mexico from Hurricane Ike was limited, meanwhile, sending world oil prices to a seven-month low of $96 per barrel, and pulling Russian oil stocks down with them.

Oil majors fell across the board, with Tatneft leading the decline, falling by 9.9 percent, Rosneft losing 8.4 percent, Surgutneftegaz falling 8.2 percent, and LUKoil dropping by 8 percent.

TNK-BP and Gazprom Neft emerged relatively unscathed, losing 3 percent and 2.8 percent, respectively.

Both major indexes closed in the negative, with the RTS shedding 4.8 percent of its value and the MICEX Index falling by 6.2 percent.

"Any slight fall in the price of oil on the world market is bound to have a decisive impact on domestic oil stocks because investors are very edgy at present," said Geldy Soyunov, an oil market analyst at financial company Otkritie.

"The situation is made worse by official pronouncements that tax holidays promised to Russian oil companies in May would no longer materialize," Soyunov said, referring to recent comments by Finance Minister Alexei Kudrin that additional cuts in oil sector taxes were not in the offing.

Political fallout from last month's military conflict with Georgia and recent economic tumults surrounding mining and metals company Mechel and British-Russian joint oil venture TNK-BP appear to have played heavily on investors' nerves.

"The reaction in the Russian financial market is mainly psychological," said Natalya Orlova, a banking analyst at Alfa Bank. "But with the demise of Lehman Brothers, the Russian economy may take a beating, because domestic investors will not be able to borrow to prop up the Russian financial markets."

This threatens to make it even more probably that the domestic economy will be overly dependent on the resource sector for the long term.

Foreign investment banks are likely to be less aggressive in expanding in the Russian market if parent companies like Lehman Brothers and Merrill Lynch are mired in problems at home, Orlova said.

Lehman Brothers, which only reopened offices in Russia last year after exiting in the wake of 1998 financial crisis, had announced plans to expand its operations in the country.

Merrill Lynch, which announced Monday that it was being bought by Bank of America, currently operates a brokerage that trades on both the MICEX and RTS, and provides consulting services for Russian majors like RusAl and Norilsk Nickel.

"The [Lehman Brothers and Merrill Lynch] saga creates enormous uncertainty in the market," said Tom Mundy, an analyst with Renaissance Capital. "But I think the market is also trying to parse what is going to happen to AIG. And there is also the issue of what is going to happen to oil prices, which have come down strongly today."

AIG, a huge U.S. international insurance and financial organization, is looking for a $40 billion bridge loan from the U.S. Federal Reserve to help it through a restructuring plan, and a failure to receive the funds might send another tremor through an already jittery global market.

"The question mark hanging over AIG could suggest that we haven't got to the bottom of the market yet," Mundy said.

With financial companies, and banks in particular, dealing in trust, any crisis of confidence in the system can shake stocks across the spectrum, said Richard Hainsworth, CEO of RusRating.

"We are now beginning to see the multiplier effect of the fallout from the global credit crunch in Russia," Hainsworth said. "Though the Russian banking system is stronger than it was a few years ago, the fact that some banks like Merrill Lynch have operations here makes a negative impact inevitable."