Markets inured to Anglo-Russian friction: analysts

By Douglas Busvine

MOSCOW (Reuters) - The British government's expulsion of four Russian diplomats in a row over the murder of a former KGB agent will not stop Russian companies from coming to London to tap its capital markets, analysts said on Tuesday.

Russian stocks shed 1 percent after Britain escalated its response to Russia's refusal to extradite Andrei Lugovoy, the prime suspect in the fatal poisoning last year of emigre Alexander Litvinenko.

State-controlled oil firm Rosneft scrapped a $2 billion Eurobond, blaming volatile markets and preferring to wait to refinance some of its $22 billion in short-term debt.

But, analysts said, neither development was clearly linked to the Litvinenko case. Both governments quickly said they wanted to stop the row from spreading from politics to affect the two countries' lucrative business and financial ties.

"The markets have grown increasingly immune to such diplomatic shenanigans," said Roland Nash, chief strategist at Renaissance Capital in Moscow.

The rouble was rock solid at multi-year highs against the U.S. dollar, and fixed income analysts said a $430 million auction of five-year government bonds on Wednesday looked set to do well.

Foreign investors, attracted by Russia's abolition of capital controls a year ago, are raising exposure to the rouble in anticipation that the central bank will let the currency appreciate to help its fight against inflation.

THE TIES THAT BIND

British direct investment into Russia totaled $3.1 billion in the first quarter of 2007 alone, and blue chip firms such as Royal Dutch Shell and BP are committed for the long haul despite losing control of landmark projects.

Resources Minister Yuri Trutnev said British firms in Russia would not be affected. "We will continue working as usual and don't see any reason to review our approach to foreign investments," Russian news agencies quoted him as saying.

Russian firms are coming to London in droves to raise capital, including state-controlled bank VTB, which raised $8 billion in the world's largest international public offering this year.

"Investors are definitely taking the view that this is a storm in a teacup that won't cause any damage to sentiment," said Chris Weafer, chief strategist at Alfa-Bank.

"But there is an element of caution, because if it does escalate, then the equity market will react."

Russian stocks underperformed other emerging markets by around 15 percent after tempers frayed in April over the removal of a Soviet war memorial in Estonia. A similar outcome is possible if the situation deteriorates, Weafer cautioned.

The next acid test will be whether United Company RUSAL, the world's largest primary aluminum producer, proceeds with a listing on the London stock market that could raise $8 billion.