The Risk Level Rises Sharply In Russia

News of bombs falling in Georgia slammed Russian investor sentiment on Friday, leading stock markets to plummet, the rouble to wilt, and rating agencies to note the risks of an all-out war in the Caucasus. The mounting violence was the latest in a stream of bad news that has sapped investor appetite for Russia since last month, and pushed the RTS Index down 25 percent since July 1. The government's fierce criticism of coal miner Mechel last month triggered a bear market, which was exacerbated by the start of a major retreat in the oil price.

50 basis points was added to Russia's overall risk premium on Friday alone, and the weakening rouble may well encourage investors to further unwind positions in Russia.
Fears have also increased that Russia's fiscal policy might be further be weakened by the conflict, as security agencies asked for more budget funds from the finance ministry. The spread on five-year Russian sovereign credit default swaps (CDS) - instruments with which bondholders insure themselves against a possible default -widened to 116 basis points from Thursday's 102.

The ruble also fell by more than 1.3 percent against the dollar on Friday, striking a further blow to investors appetite for ruble-denominated paper. The dollar's unexpected strength was in part due to a broad-based rally in the U.S. currency as it reacted to concerns about the health of Japanese and euro zone economies.

The rouble, seeing record trading volumes of $14 billion, three times above the average, weakened to 29.75 versus the basket of 0.45 euros and $0.55, retreating further from a high of 29.26 set on Monday.


The most liquid stocks were hardest hit on Russian and Georgian exchanges as traders sold whatever they could. Russia's benchmark RTS index fell 6.5 percent to 1,722.7 points, its lowest levels in 14 months, prompting Raiffeisen bank in Vienna to lower its year-end target for the index by 600 basis points to 1,900. Though less hurt, the MICEX came within half an index point of a 21-month low, trading as low as 1,352.9 points.

Russia's largest oil firm, state-controlled Rosneft, fell 7.8 percent while gas export monopoly Gazprom shed 5.2 percent. Outside the energy sector, car maker AvtoVAZ lost 8.7 percent and Sberbank fell 6.3 percent.


As the fighting escalated, nervousness spread to emerging markets outside of Russia and its former Soviet satellite, pushing the MSCI benchmark index for all emerging markets to its lowest level since August 2007.

Moody's ratings agency said that the escalating conflict should not affect Russia's sovereign debt rating or outlook. Fitch said earlier in the year that any conflict would be more likely to prompt a downgrade of Georgia than its much larger neighbour.
But it warned any conflict sparking a division with the West might make it more difficult for Russian firms to refinance their corporate debt.