Russia’s leading stock market index fell 4% to its lowest level since 2006 today after Russian President Dmitry Medvedev formally recognised the breakaway Georgian regions of South Ossetia and Abkhazia as separate countries. The Russian Ruble also plunged, and credit default swaps on Russian government debt rose by 7 basis points.
The market tumble will likely do more than any Western jawboning to persuade Russia to back down from its newfound aggressiveness. But we still expect that a confrontation with Ukraine looms, and this could have a far bigger impact on world energy prices.
Investors have pushed the RTS to this quarter’s steepest retreat among the world’s stock markets as Russia invaded Georgia and tumbling oil prices sent energy producers lower. Medvedev’s statement today accelerated a decline sparked by a drop of more than 2 per cent in crude and slumping metals prices.
“The sentiment here remains pretty bad because of the events in Georgia,” said Jean-Louis Tauvy, who manages $300 million at Atria Advisors Ltd. in Moscow.
The dollar-denominated RTS Index fell 4.3 per cent to 1,576.36 at 5:48 p.m. in Moscow, extending its third-quarter drop to 32 per cent. The ruble-denominated Micex Index slumped 2.1 per cent to 1,292.92, the lowest level since September 2006.
The development represents a modest, if largely expected, escalation in the crisis. Initially, Russia defined its mission in Georgia in terms of “restoring order” in the contested regions,. Where the crisis goes from here depends on the West’s response. After issuing the typical condemnations, the U.S. and Europe may may opt to kick Russia out of the G8 and threaten to indefinitely derail its application to the World Trade organisation.
Either way, the conflict has played out as much as it can in Georgia. Russian troops have largely pulled out of Georgia proper, and aside from rattling the sabre, there isn’t a whole lot more to do besides patrol buffer zones. As we discussed last week, the likeliest scenario is that the showdown shifts from the caucuses to Ukraine, where the stakes will be much higher.
Business Insider Emails & Alerts
Site highlights each day to your inbox.