Russia Becomes Worst 3rd-Quarter Stock Market on Oil

By William Mauldin

Aug. 13 (Bloomberg) -- Russia's RTS stock index is turning into the world's worst performer this quarter as tumbling oil, a war in Georgia and the probe of a steel company remind investors owning shares in the former Communist nation can be perilous.

The RTS fell 22 percent since June 30, even after President Dmitry Medvedev halted the invasion of Georgia yesterday, sending the index up 3.5 percent. The retreat this quarter is the steepest among indexes in the world's 20 biggest stock markets, according to data compiled by Bloomberg.

While the slump pushed valuations of the 48 companies in the index to the lowest level since March 2006, Firebird Management LLC, Credit Suisse Group's Clariden Leu and Banco Santander SA are avoiding the country. The government's investigation of steel producer OAO Mechel comes five years after the state's assault on OAO Yukos Oil Co., while its decision to send tanks into Georgia shook confidence in Medvedev.

``This bounce should be sold,'' said Ian Hague, the New York-based founding partner of Firebird, who reduced Russian stock holdings in the past three months to less than half of the $1.8 billion he had invested in countries that made up the former Soviet Union.

``Russia will be a pariah. It is a pariah. It's difficult to do anything other than reduce your exposure,'' Hague said yesterday after returning from Tbilisi, the Georgian capital.

Cold War

Russia promised to pull troops from Georgia after Medvedev ordered an end to a five-day incursion in the former Soviet republic. The conflict was Russia's first major foreign offensive since the collapse of the Soviet Union in 1991, and strained relations with the U.S., as President George W. Bush said the action would have ``serious consequences'' if it continued.

The RTS Index fell 2 percent since the invasion began on Aug. 8. The dollar-denominated gauge rose 0.2 percent to 1,806.59 as of 11:36 a.m. today in Moscow, leaving it 27 percent below its record high of 2,487.92 in May. The RTS surged 14-fold during Vladimir Putin's presidency from 2000 to 2008.

OAO Rosneft and OAO Lukoil, Russia's biggest oil producers, helped drag down the RTS. The Moscow-based companies tumbled more than 17 percent since June through yesterday as crude slumped 23 percent from the July record of $147.27 a barrel. Moscow-based OAO GMK Norilsk Nickel, Russia's biggest mining company, sank 26 percent as the Reuters/Jefferies CRB Commodity Index posted the biggest monthly drop since 1980 in July.

Every stock in the RTS except St. Petersburg-based OAO Polymetal, Russia's largest silver producer, declined. Moscow- based Mechel, controlled by billionaire Igor Zyuzin, slid 41 percent.

Siberian Labor Camp

Prime Minister Putin accused Mechel of price fixing on July 24, and said four days later the company used offshore traders to minimize taxes. The actions spurred comparisons with the dismantling of Yukos, which was bankrupted in 2006 during Putin's presidency after the government claimed more than $30 billion in back taxes.

Yukos' founder, Mikhail Khodorkovsky, is serving eight years in a Siberian labor camp. Some of his company's assets were transferred to state-controlled Rosneft. The RTS Index fell 11 percent in October 2003, the month of Khodorkovsky's arrest, as investors grew concerned that more companies would fall victim to government takeovers. It was the index's worst monthly decline in two years at the time.

Putin presided over eight years of economic growth as president. Medvedev, his handpicked successor, has struggled to combat inflation since taking over in May.

`Bad to Worse'

JPMorgan Chase & Co. cited the ``risk that non-conventional methods may be used to control inflation,'' when it cut Russian stocks to ``underweight'' last month. The New York-based bank also said that economic ``momentum'' was slowing in the world's biggest energy exporter.

Russia's annual inflation rate was 15.1 percent in both May and June, matching the highest level in five years, data from the Federal Statistics Service show. The International Monetary Fund estimates the country's economic growth will slow to 6.8 percent this year from 8.1 percent in 2007. The Washington-based fund expects a 6.3 percent expansion in 2009, which would be the weakest since 2002.

``Unfortunately, the global and even the Russian macroeconomic picture is going from bad to worse,'' said Zina Psiola, who manages $1.1 billion in Russian stocks at Clariden Leu in Zurich.

`Not as Evil'

The RTS rallied 4.7 percent this week through yesterday as Medvedev said Russia secured the safety of its peacekeeping troops and citizens in the breakaway regions of South Ossetia and Abkhazia.

The index was valued at 9.8 times earnings at the end of last week, the cheapest since March 12, 2006, weekly data compiled by Bloomberg show. The 62 percent discount to the Standard & Poor's 500 Index, the benchmark for American equities, was the widest since 2005, making the market attractive to investors such as Wermuth Asset Management's Jochen Wermuth.

``Negative news is at a record level, and there's too much irrational fear in the case of Mechel and Georgia,'' said Wermuth, who manages about $1 billion in Frankfurt. ``Russia is not as evil as people think.''

For Banco Santander's Nerea Heras, Russian equities aren't cheap enough to compensate for political risk and accelerating inflation. Heras, who manages about $1.5 billion in emerging markets equities in Madrid, is buying shares in Turkey and India.

``There are other interesting countries to invest money in rather than Russia,'' Heras said.

To contact the reporter on this story: William Mauldin in Moscow at wmauldin1@bloomberg.net.