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. Last Updated: 07/27/2016

As Conflict Ends, Markets on Road to Recovery

APTraffic creeping along the eastbound lanes of a highway in Mississippi as residents fled the state and Louisiana on Saturday ahead of Hurricane Gustav.
After tumbling to its lowest point in almost two years on Tuesday, Russia's MICEX Index began to slowly claw its way back over the rest of the week, suggesting a possible end to the volatility that has plagued the country's markets since tensions erupted between Russia and Georgia on Aug. 8.

While daily drops and jumps of up to 4 percent can still be expected in the weeks to come, the market will slowly start to recover, investors and analysts said.

"Barring some other military issue between Georgia and Russia, we've probably seen at least the near-term low on this issue," said James Fenkner, managing partner at Red Star Asset Management. "If commodity prices stay up and inflation rates remain moderate in Russia, then I think the market could do relatively well in the fourth quarter."

Over the week, the ruble-denominated MICEX fell 1.9 percent to 1,348.92 points, while the dollar-denominated RTS Index dropped 3.3 percent to 1,646.14 points.

Both indexes fell after President Dmitry Medvedev on Tuesday officially recognized the Georgian separatist territories of South Ossetia and Abkhazia. MICEX dropped to its lowest level since Sept. 2006, falling as low as 5.8 percent since Monday's close in the minutes following Medvedev's announcement.

But almost immediately, markets began to bounce back. The MICEX ended the week 8.4 percent higher than at its low point on Tuesday, while the RTS was 6.4 percent up from its Tuesday low at Friday's close.

"The market rocketed up with the realization that there was nothing the West could do about it," Fenkner said, referring to Medvedev's declaration.

Analysts predicted that Russian markets would gradually stabilize over the course of the next couple of months, and said rising oil prices were already making foreign investors more optimistic.

State-controlled Rosneft reported a strong second quarter on Thursday, with a bigger than reported net profit and crude oil export value up 80 percent year on year. Company revenue increased by 96 percent year on year, and Rosneft reported both upstream and downstream growth.

Rosneft's stock rose 1.8 percent on the MICEX on Friday, and was 5.1 percent higher on the week. International oil prices rose across the board on Friday as then-tropical storm Gustav made its way toward the United States.

"There are two keys factors that determine the level of the index: risk factor and oil prices," said Kingsmill Bond, chief strategist at Troika Dialog. "This week the oil prices finally stopped falling, giving people grounds for optimism."

In contrast to Rosneft, the company's domestic competitor, LUKoil, reported a lower-than-predicted net income increase Friday. UBS cut its price estimate on LUKoil's shares by 2.5 percent, and its stock fell by 2.7 percent Friday on the MICEX.

On global currency markets, the dollar fell against both the euro and the yen Friday, as the market prepared itself for Gustav, which strengthened to a hurricane over the weakened, prompting the evacuation of New Orleans and threatening U.S. refineries on the Gulf of Mexico.

Tensions with the West resurfaced Friday when British newspaper The Daily Telegraph reported Russian oil companies were under orders to prepare for an oil and gas reduction to Europe on Monday, in case European Union countries at a summit voted for sanctions against Russia over Georgia.

Both analysts and investors dismissed the report.

"Given the history of Russia as a dependable supplier, this is not that big an issue," Fenkner said. "They were selling gas into Germany during the Cold War."

He added that the West was still in better standing with Russia than with other oil exporters, such as Iran and Saudi Arabia. "It's the lesser of global evils," he said.

Political tensions will continue to influence the Russian market's recovery, analysts said.

Bond, of Troika Dialog, said the Russian markets' volatility might only end after the U.S. presidential election in November.

"At the moment, the U.S. election has the potential to become a catalyst in one way or another for this market," he said, adding that the policy stance of a U.S. administration led by John McCain or the less hawkish Barack Obama toward Russia would guide the actions of foreign investors.