Tension hits Russian markets

By Peter Apps

LONDON, Aug 26 (Reuters)
The value of Russian assets tumbled on Tuesday as tension grew between Moscow and the West over Georgia, with the impact spreading across eastern Europe as far as Poland. Russian President Dmitry Medvedev announced Moscow would recognize two rebel regions of Georgia as independent states, while the Kremlin’s ambassador to NATO compared the situation to 1914 and the outbreak of World War One.Russian stocks lost 4.2 percent, putting them down 31 percent so far this year. At one stage in the day they were down 6.1 percent and at their lowest since October 2006.
The cost of insuring Russian debt in the five-year credit default swaps market rose to 137-139 basis points from 126 at Friday’s close, meaning it would cost$137-139,000 a year for five years to insure $10 million of debt.
“The main potential impact on Russia is through an impact on capital flows into the country… affecting foreign investment,” Edward Parker, head of emerging European sovereigns at Fitch ratings agency, told Reuters.
He said Russia’s oil-rich economy could easily absorb the cost of the Georgia war itself but was still vulnerable.
Russian companies have continued to see good profit growth — between 23 and 75 percent in the first taste of this year’s second quarter financial reports — but that has not yet been enough to encourage spooked investors to return.
On top of the Georgia conflict, investors have been put off as oil giant BP fights to retain control of its local joint-venture and after Prime Minister Vladimir Putin attacked New York listed coalminer Mechel.
Fitch warned that Russian corporate and quasi-sovereign borrowers might find lenders increasingly nervous in a global credit market already drained by the Western credit crunch.
The cost of insuring the debt of Russian gas giant Gazprom rose around 5 basis points to 260 bps, compared to around 230 before the conflict broke out August 7-8.
Credit agency Standard and Poor’s said Russia’s economy itself was more dependent on issues other than the row with the West over Georgia.
“At the end of the day, what matters most for Russian creditworthiness is whether commodity prices will hold and whether the consumption boom is sustainable,” S&P director of European sovereign ratings Frank Gill told Reuters.
But he warned he could not rule out negative ratings moves in the Baltic states if Russia became more aggressive.
Fear of worsening tensions with Russia have begun to dent investor sentiment towards a string of nearby countries, with Georgia inevitably the worst hit.
Georgia’s debut five-year Eurobond widened by 15 to 20 basis points on Tuesday to around 700 basis points above U.S. Treasuries. The bond launched in April at a yield spread of 474 points over Treasuries.
Ukraine, seen by most investors as next most exposed to a potential conflict with its giant neighbour, saw the cost of insuring its debt rising sharply.
Ukraine credit default swaps rose 14 basis points on Tuesday to 440-450 bps, off peaks seen earlier in the Russia-Georgia conflict but still well above their pre-conflict levels around 400.
But with Moscow furious over the United States stationing defence shield missile systems in Poland and the Czech Republic, investors are even expressing more concern over what were until recently seen as some of the safest emerging markets.
The cost of insuring Poland’s five-year debt against default in the CDS market is up around a third since the Georgia conflict began, widening to 70 basis points from around 50 when Russian and Georgian troops first met in battle on August 8.
“Some risk premium is starting to build up in the Czech Republic and Poland because of the Czech and Polish acceptance of U.S. missiles,” said Elizabeth Gruie, emerging market strategist at BNP Paribas.
(additional reporting by Carolyn Cohn and Sebastian Tong; Editing by Gerrard Raven))


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