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Russia’s Geopolitical Aims Trump Investors’ Concerns

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Russia’s Geopolitical Aims Trump Investors’ Concerns

August 11, 2008

In bringing its conflict with Georgia to the brink of war, Russia is sending a loud and clear message to the markets: Investors’ interests take a back seat to the country’s growing geopolitical ambitions.

Investors could be in for a teeth-grinding ride as Russia’s standoff with its neighbor over the enclave of South Ossetia takes its toll on everything from Russian stocks to the price of oil. But with Russia swimming in export wealth and acting as a net investor in the rest of the world, foreign business interests aren’t in a position to have much say.

“I think Russia is going to do what it wants no matter what foreign investors think,” says Marino Valensise, chief investment officer at London-based Baring Asset Management, which has about 8% of its $50 billion investment portfolio in Russia. “People will still be investing in Russia no matter what. The market is just too important to be neglected.”

Russia’s aggressive stance highlights how much its economic position has changed in the past decade. As recently as the late 1990s, when Russia was heavily dependent on the West for loans to make ends meet, the desire to attract foreign investors could at times play a role in political decision-making. Now the country’s economy is growing at an annualized rate of more than 8% and foreign-exchange reserves are nearly $600 billion, leaving Russian leaders with much less reason to court the West.

The conflict has the potential to affect markets around the world, in part because of its proximity to pipelines carrying oil from the Caspian Sea. A rise in oil prices on worries about those pipelines could actually strengthen the hand of Russia, which depends on the commodity for much of its export revenue.

Georgian officials said Sunday that Russian warplanes had bombed areas close to a pipeline that stretches through Georgia from the Azerbaijani port of Baku to Ceyhan in Turkey. BP PLC, which has a 30% stake in the pipeline, said it was taking measures to protect the flow of oil.

On Friday, oil prices tumbled despite the conflict. Crude for September delivery slid $4.82, or 4%, to $115.20, its lowest settlement since May 1.

Jitters over war also come at a particularly difficult time for Russian markets. In recent weeks, Russian stocks have fallen sharply amid weaker commodity prices and a slew of negative news. Aside from a battle between the British and Russian partners in oil company TNK-BP Ltd., Prime Minister Vladimir Putin sparked new concerns about government intervention in corporate matters last month when he singled out steel and coal producer OAO Mechel for public criticism.

The news on Georgia “was kind of the last straw” for some investors in the equity market, says Roland Nash, chief strategist at investment bank Renaissance Capital in Moscow. “If Russia had any kind of safe-haven status a month ago, it doesn’t now.”

Russia’s RTS stock index, already down about 16% over the preceding month, fell another 6.5% Friday on news of the fighting in South Ossetia. The RTS closed at 1722.71, its lowest level since November 2006.

The ruble also fell sharply in relation to the dollar, ending the week down 0.9% against the U.S. currency.

In the longer term, though, foreign investors have shown an immense capacity to swallow their concerns about Russia’s behavior and focus on its vast natural resources and fast-growing markets. In the year following Mr. Putin’s brutal 1999 invasion of the republic of Chechnya, the RTS index rose 141%.

Some investors are already making the case that the conflict offers an opportunity to buy. “Obviously it’s unfortunate that it had to go to this,” says Mattias Westman, chief executive of Prosperity Capital Management, which has about $5 billion under management, almost all of it in Russia. “But in reality it will probably have a minimum impact on the economic life of Russia.”

Write to Mark Whitehouse at [email protected] and Jeanne Whalen at[email protected]

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