By Peter Apps
LONDON, Aug 8 (Reuters) - Heavy fighting between Georgia and separatists — and Russian threats of a "response" — undermined Russian assets and broader emerging markets on Friday, with a stronger dollar also hitting currencies.
Georgian troops and warplanes pounded separatist forces around the capital of its breakaway South Ossetia region, and Georgia accused Russian jets of bombing its territory.
Benchmark emerging equities were down 0.91 percent by 1000 GMT, with Russian stocks among the greatest losers, down 2.89 percent — a move also attributed in part to a weaker oil price and broader global equity sell-off.
"The military conflict is obviously adding to negative sentiment, not just for Russia but for emerging markets in general," said emerging market strategist Nigel Rendell at Royal Bank of Canada. "If it is still continuing after the weekend I think we will see further weakness."
Russian President Vladimir Putin said the Georgian leadership had resorted to "very aggressive actions", saying some Russian peacekeepers were among the casualties and that would "incur a response".
The rouble weakened around 20 kopecks against the basket of 0.55 dollar and 0.45 euros, although analysts said this was in part due to a sharp retreat in the euro after dovish European Central bank comments on Thursday.
But investor sentiment in Russia is already dented by sharp falls in oil and commodity prices during July as well as worries over a battle for control of oil giant BP’s local joint-venture and an attack by Putin on coalminer Mechel. So a clash with the West over Georgia is seen as bad news.
Russian stocks are down 22 percent this year.
"There is now a very serious risk of mass equity sales on the Russian market," said Sobinbank head of market analysis Alexander Razauvaev, advising against short-term positions in an increasingly volatile market.
The cost of insuring Russian debt in the credit default swaps market increased slightly to 106 basis points from Thursday’s 102.
Georgia has little in the way of traded international instruments except for its $500 million Eurobond launched earlier this year, which is relatively illiquid. Ratings agency Fitch warned on Thursday before overnight fighting that an escalation to all out conflict could hurt its creditworthiness.