Russian Stocks and Ruble Tumble as Medvedev Recognizes Regions

By William Mauldin and Emma O'Brien

Aug. 26 (Bloomberg) -- Russia's RTS Index fell to the lowest level in almost two years and the ruble dropped after the government's decision to recognize Georgia's breakaway regions threatened to deepen a rift with the West.

The RTS index of 48 companies posted the biggest decline among 89 global equity measures tracked by Bloomberg, while Russia's currency slid to the lowest level in almost seven months against the dollar. Credit-default swaps on Russian debt climbed 8 basis points, according to CMA Datavision prices in London, as the U.K. Foreign Office ``categorically'' rejected President Dmitry Medvedev's move and Italy and France expressed regret.

Investors have pushed the RTS to this quarter's steepest retreat among the world's stock markets as Russia invaded Georgia, tumbling oil prices sent energy producers lower and the government probed steel producer OAO Mechel. Medvedev's statement today accelerated a decline sparked by an earlier drop of more than 2 percent in crude and slumping metal prices.

``Russia particularly could really shock some people on the downside,'' Michael Aronstein, chief investment strategist at Oscar Gruss & Son Inc. said in a Bloomberg Television interview. There's a ``complete lack of governance or any rule of law. Beyond that it's very resource-dependent. We've been pretty bearish on the whole commodity complex,'' he said in New York.

The dollar-denominated RTS Index fell 4.2 percent to 1,579.12 at the close in Moscow, extending its third-quarter drop to 31 percent. The ruble-denominated Micex Index slumped 2.1 percent to 1,292.92, the lowest level since September 2006.

Putin's Reign

The RTS has lost 14 percent since Russia invaded Georgia on Aug. 8, leaving it 37 percent below its record high of 2,487.92 in May. The index surged 14-fold during Vladimir Putin's presidency from 2000 to 2008.

OAO Sberbank, Russia's biggest bank, tumbled 6.4 percent to 56.01 rubles today, the lowest level in almost two years.

``I signed decrees on the recognition by the Russian Federation of the independence of South Ossetia and Abkhazia,'' Medvedev said on television from Sochi today. ``Russia calls on other states to follow its example.''

All but two of the 30 stocks in the Micex declined today. OAO Gazprom, the country's biggest publicly traded company, sank for a third day, losing 0.9 percent to 230.79 rubles. OAO AvtoVAZ, Russia's biggest carmaker and the Micex's worst performer this year, tumbled 8.4 percent to 16.31 rubles.

OAO GMK Norilsk Nickel, Russia's biggest mining company, fell 1.7 percent to 4,855.83 rubles. Nickel, used in making stainless steel, dropped on the London Metal Exchange.

Political Side

``Things must settle on the political side or we need a rebound in commodity prices to see a stabilization in equity markets,'' said Paul Van Homelen, who manages $15 billion in emerging-market stocks at Robeco Group in Rotterdam. ``Whether there will be some sort of relief in Russia's relation with the West right now is hard to say, and that does not help.''

Credit Suisse Group today said the RTS may still rise to 2,600 by the end of the year, citing estimates that Russian companies may report earnings growth of 50 percent this year.

``We understand why some investors are concerned, but we have to keep our eyes on the long-term fundamentals,'' said Liam Halligan, chief economist at Prosperity Capital Management in London, which manages about $5 billion in the former Soviet Union. ``A lot of foreign money is susceptible to tales of woe in the Western press.''

Russia's ruble declined as much as 1.3 percent to 24.7676 to the dollar, the lowest since Feb. 7. The intraday drop was the biggest since Aug. 8, when Russia sent troops and warplanes to Georgia.

`Prolonged Period'

Credit-default swaps on Russian government debt rose 8 basis points from Aug. 22 to 136, according to CMA Datavision prices at 3:53 p.m. in London. Contracts on Gazprom rose 10 basis points to 266, CMA prices show.

Credit-default swaps, contracts conceived to protect bondholders against default, pay the buyer face value in exchange for the underlying securities or the cash equivalent should a company fail to adhere to its debt agreements. A rise indicates deterioration in the perception of credit quality; a decline signals the opposite.

A basis point on a credit-default swap contract protecting $10 million of debt from default for five years is equivalent to $1,000 a year.

``This adds to the uncertainty of doing business in Russia,'' said Lars Rasmussen, an emerging-markets analyst at Danske Bank A/S in Copenhagen. ``It now seems like this conflict could go on for a prolonged period.''

To contact the reporter on this story: William Mauldin in Moscow at wmauldin1@bloomberg.net; Emma O'Brien in Moscow at eobrien6@bloomberg.net.