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Georgia, Khodorkovsky case hurt Russia sentiment

Georgia, Khodorkovsky case hurt Russia sentiment

Denial of parole for a jailed Russian oil tycoon and tension between Russia and the West over Moscow's military clash with Georgia are giving global investors increasing reasons to worry whether the country is the right place to be.
The refusal Friday by a Siberian court to grant early release for former Yukos head Mikhail Khodorkovsky came as investors were already pulling money out because of falling oil prices, the spreading global credit crunch and fears of political meddling in business.
The dollar-denominated MICEX index of leading Russian stocks has dipped 4 percent since the start of hostilities on Aug. 8, and interest rates on some Russia bonds have risen compared to U.S. Treasuries, indicating greater perception of risk.
"Unknown political risk and constant negative headlines are not likely to induce investors to buy," investment bank Troika Dialog said in a report Monday.
Khodorkovsky was imprisoned for eight years in 2005 on a fraud and tax conviction; the subsequent demand for huge back taxes led to the effective renationalization of Yukos, which was taken over by the state oil company Rosneft.
His ongoing incarceration is a "completely political decision" that further illustrates the extent to which Russia's leaders interfere with business, said Ben Yearsley, investment manager at Hargreaves Lansdown Stockbrokers.
Georgia added to the sense of uncertainty that was already weighing on stocks even before the clash broke out Aug. 8. Investors were being being scared off by new fears that politics could disrupt business, as a dispute between oil major BP PLC and Russian billionaire shareholders over the BP-TNK oil joint venture chilled the investment climate as the venture's CEO was forced out of the country over immigration issues.
Then, Prime Minister Vladimir Putin accused Russian mining company Mechel of price fixing, causing Mechel's shares to plummet.
As a result of this cocktail of factors, major funds have started reining in investment, as suggested by a recent drop in foreign currency reserves and the stock market dip.
Elena Shaftan, head of Jupiter's Emerging European Opportunities fund, which has around 600 million pounds ($1.1 billion) under management, said fears over the Mechel case combined with falling commodities prices _ Russia is the world's largest single oil producer _ caused the fund to reduce its exposure to the country from 70 percent to just 45 percent earlier this month.
"We were concerned that the declining oil price and the Mechel case would put pressure on the margins of companies and hence their earnings," she said.
Maxim Osadchiy at Moscow-based Antanta Pioglobal investment bank said that all markets in Russia are seeing capital flight. "Foreigners are selling out bonds, which is seen from bigger spreads and stocks, which is clear from declining benchmarks," Osadchiy said.
The interest rate gap, or spread, between Russian government eurobonds has risen from 157 basis points over U.S. Treasuries Aug. 8 to 183 basis points, indicating higher risk premium.
Still, many economists and investors believe that Russian market jitters will pass soon, especially since Russia is still enjoying strong economic growth of 8 percent even as many world economies are on the brink of recession.
Some think the uncertainties may mean the country also offers a good deal compared to other emerging economies. Whereas Chinese companies usually trade for around 16 times earnings, Russian companies tend to trade at just 7 times earnings.
"We believe the market has overreacted somewhat" to the Georgia-Russia conflict, said Ivan Tchakarov, Russia economist at Lehman Brothers. "While many investors were plainly shocked by the escalation of the conflict with Georgia, we think that those bold enough to increase their Russia exposure at this time of perceived elevated political risk may be rewarded."
Ghadir Abu Leil-Cooper, manager of Baring Asset Management's Russia fund, agreed: "Although volatility can be unwelcome in the short term, it is precisely at times such as this that active managers can take advantage of market inefficiencies."
"We believe the long-term investment case for Russia is compelling," she added.
The reality is that Russia has less reason to worry about about courting foreign money now than after its embarrassing 1998 financial collapse. A decade ago, when Russia relied on the West for loans and needed to attract foreign private investment for economic growth, the country's rulers might have worried more that a war and overt political interference with business might scare these investors off its soil.
Today's Russia is in a position to dictate its own terms. Flush with wealth from exporting oil and gas, Russia is a net investor into the rest of the world, the economy is growing faster than 8 percent a year, and it boasts foreign-exchange reserves of $600 billion.
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Associated Press writer Nataliya Vasilyeva in Moscow contributed to this story.


Updated : 2021-05-13 12:11 GMT+08:00