Russia: Asset values turn volatile under fire

The escalating conflict between Russia and Georgia over the breakaway region has battered the investment prospects for both countries as they are pitched into the worst conflict in the region in 20 years.

Russia’s RTS index closed 6.5 per cent down on Friday and investors were braced for further volatility as the conflict spread into the second breakaway republic of Abkhazia.

Russia’s massive military intervention shocked investors who were already troubled when Vladimir Putin, the powerful Russian prime minister, wiped $60bn off the stock market by accusing Mechel, a publicly traded Russian steelmaker, of price-gouging and tax evasion. The RTS has fallen almost 20 per cent in just six days.

One investor, speaking on condition of anonymity, said he was shocked when he heard the news of Russia’s military action. “Is there anybody in charge of the asylum now?” he asked. “I don’t know about Georgia or Ossetia but a lot of investors are lining up to surrender.”

Roland Nash, head of research at Renaissance Capital, Russia’s largest investment bank, said the conflict was the biggest wave of bad news to hit Russian assets since the Yukos affair in 2004. “Russia has gone from being perceived as a safe haven for investment, with a large foreign reserve, exposure to commodity prices and a booming economy – to being perceived as a risky asset class in the space of a month,” he said.

The value of Russian assets was now dependent on the uncertain situation in Georgia. “However, we think that, with fundamentals remaining solid, asset prices are due a rebound within a matter of days.”

Michael Ganske, analyst at Commerzbank, expected a deterioration of investor sentiment towards Russian assets. “Last week’s attack on Mechel’s pricing behaviour by Putin and the lasting TNK-BP saga found a bloody next act in a screenplay that could be named ‘how to destroy the investment story of one of the strongest credits in the emerging markets universe’,” he said.

Georgia, which has little foreign inward investment, looked likely to fare little better. Edward Parker, Fitch’s head of emerging European sovereigns, told Reuters prolonged warfare could prompt the ratings agency to downgrade Georgia from its current BB-rating with stable outlook and affect foreign investment.