Russian rouble, stocks hurt by Georgia conflict

MOSCOW Fri Aug 8, 2008 9:37am EDT

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MOSCOW (Reuters) - Russia's benchmark RTS equity index fell to a 14-month low and the rouble lost 1 percent against a euro/dollar basket on Friday, as a conflict between Russia and Georgia over South Ossetia dented sentiment.

The rouble weakened to 29.68 versus the basket of 0.45 euros and $0.55, retreating further from a high of 29.26 set on Monday. Russia's RTS equity index extended the day's fall to over 6 percent to hit a new 14-month low of 1,730.7.

The most liquid stocks were hardest hit as traders sold whatever they could, already wary of Russia due to falling oil prices, a weakening rouble and the damage brought by government criticism of coal major Mechel's last month.

"When we get one reason to sell after another, people start throwing in the towel," said Ronald Smith, chief strategist at Alfa Bank.

Smith said that 50 basis points had already been added to Russia's overall risk premium, which would continue to climb by 10 basis points for every percent that was lost.

Russia's largest oil firm, state-controlled Rosneft took one of the hardest hits, falling 6.5 percent, while gas export monopoly Gazprom shed 5.4 percent.

But the sell-off was not contained to the energy sector, Russia's most liquid. Car maker AvtoVAZ lost 8.7 percent and Sberbank fell 6.3 percent.

The spread on five-year Russian sovereign credit default swaps (CDS) -- instruments with which bondholders insure themselves against a possible default -- widened slightly to 116 basis points from Thursday's 102, trader said.

The Bank of Georgia, the most liquid stock on the Georgian Stock Exchange and the only Georgian lender listed in London, meanwhile fell more than 20 percent.

"In the morning I would have said that we have strong fundamentals and that it was a short-term event. But now with all this fighting, and troops moving into South Ossetia, the situation becomes more unclear at least for the next few days," said Andreas Schwabe, strategist at RZB in Vienna.

The falling rouble struck a separate blow to investor sentiment, as the Russian currency fell more than 1.3 percent against the dollar, which plays a bigger part than the euro in the currency basket.

That was in part thanks to a broad-based rally in the U.S. currency, which was reacting to concerns about the health of Japanese and euro zone economies.

As the fighting escalated, nervousness struck 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.

"Escalation (of the conflict) looks likely, and when things are escalating it's hard to predict where it stops. So it is very reasonable to add risk premiums," Smith said.

(Reporting by Simon Shuster and Toni Vorobyova; Editing by Hans Peters)

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