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. Last Updated: 07/27/2016

Stocks Retreat After Political Turmoil

Stocks took a battering Wednesday as investors used Russia's political turmoil as an excuse to cash in on profits gleaned over the past few weeks.

Traders said that Kremlin-aligned Unity party's surprise alliance Tuesday with the Communist Party in re-electing Gennady Seleznyov as speaker of the State Duma caught investors off guard, but they were also heartened by signs from acting President Vladimir Putin's that he would follow a reformist economic policy.

"The [unexpected alliance in the] Duma is giving Westerners an excuse to take profits," Nancy Herring, director of research at Regent European Securities, said. "But my sense is we are not seeing a stampede for the doors in any way."

The dollar-denominated Moscow Times Index of 50 leading shares on Wednesday tumbled 6.04 percent to 139.81on strong turnover of $36.015 million. The main over the counter trading system RTS1-Interfax fell 5.63 percent to 183.63.

Stocks had been surging this month on optimism over Putin's rise to the presidency and it hit fresh highs last Friday, despite the fact he has yet to unveil an economic policy. Traders had predicted a market correction for this week, saying the market had soared too high, too fast, and the market has not failed to disappoint. Shares have eased down every day since Monday.

Analysts said investors were pleased by hints Putin gave Tuesday on what his economic stance might be. He called for a "moderately liberal" economic policy and rejected a prohibitive Central Bank proposal to force exporters to rehabilitate all of their hard-currency earnings.

But the deal cut between Unity and the Communist Party could raise some red flags for investors, traders said.

"Clearly we would like to see [Unity] and Putin make some clarifying comments on why they made the alliance, and investors want to be assured this is a one-off event and not going to be an ongoing alliance," Martin Diggle, director of sales and trading at Brunswick Warburg, said.

Some observers speculated Wednesday that Putin had gone for the alliance only to ensure that political rivals like former Prime Minister Yevgeny Primakov did not get the speaker's chair in the Duma. Apparently, in return for Communist Seleznyov's reappointment to speaker, Unity won control of a large number of key Duma committees.

Investors should not see the deal as a threat, but rather an indication that Putin is calling all the shots in the government, some market players said.

"We should not see this [alliance] as serious because we still don't know what the economic policy of Putin will be," said Peter Westin, economist at the Russian European Center for Economic Policy.

"I don't make a lot of the Duma alliance," Herring said. "My view has been that this is pretty much Putin's show nowadays. All the balls are in his court, and that was confirmed with the election of Seleznyov in the Duma."

Russians appear to be the main investors disappointed by the Duma affair, but as long as oil prices stay high the stock market will remain bullish, traders predicted. Oil shares account for a large part of market turnover.

"We are just having a normal correction going on," Herring said.

Most shares took a beating over profit-taking Wednesday. Shares in Surgutneftegaz and Tatneft, which have outperformed in recent weeks, fell 10.5 percent and 5.3 percent, respectively. Surgutneftegaz closed at $0.285 and Tatneft at $0.575. St. Petersburg Telephone turned against the tide to firm up 6.5 percent to $0.842.