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29 Aug, 2008 11:45

Political tensions add to woes for currency and credit

Ongoing tensions about the conflict in South Ossettia have added to a volatile month for the Russian Ruble and the stock market. Market players say more capital outflows and a possible worsening of the credit environment are possible.

The conflict in South Ossetia has seen the ruble suffer its biggest monthly fall against the dollar in more than 9 years.  Foreign investors have pulled out about $10 Billion from Russia.

After a first half inflow of about $30 Billion, the political tensions could see Russia lose even more in September according to Oleg Vyugin, Board Chairman, MDM bank.

“We are in a position to see some falldown of this quick money. Then we started to see some stabilization. The question is will we see the increase of this portfolio investments. The answer is very easy.  If there will be positive changes in the political relationship between Russia and some western countries, then it will return and increase, if not -then it will be very low level achieved today, maybe tomorrow.”

Conflict in Georgia has also triggered more volatility for Russian stocks, coming after the TNK-BP row and Prime Minister Putins criticism of Mechel.  The RTS is down nearly 40% from its peak. The conflict, may also prompt a jump in Russian corporate funding costs over the longer term with the financial system currently handling the global credit crunch with relative ease.

Analyst say that only 16% of  Russian bank borrowings come from abroad – low compared to 50% in Kazahstan and 24% in Ukraine.  However the high demand for Central Bank funds shows that banks are preparing for a money hungry autumn or in case there’s need to replace foreign liabilities with domestic. Mark Rubinstein, Senior Analyst at Metropol says borrowing rates have edged higher.

“With the start of the international financial crisis and credit crunch, Russian banks experienced borrowing rates higher by just 10 to 15 basis points in the course of 2nd half of 2007 and 1st half of 2008. Going forward I don't expect it to change, unless there’s additional tension and economic sanctions directed at Russia.”

Ratings Agency, Fitch, has warned of possible problems in Russia’s banking sector and reduced investment opportunities following condemnation of Russia from the U.S. and threats of sanctions from the European Union.