Russian Stocks, Ruble Tumble as Medvedev Recognizes Regions

By William Mauldin and Emma O'Brien

Aug. 26 (Bloomberg) -- Russia's RTS Index fell to the lowest level since 2006, the ruble extended its drop and the cost of protecting the country's bonds rose as the government recognized the independence of Georgia's breakaway regions.

The RTS index of 48 companies posted the biggest decline among 89 global equity measures tracked by Bloomberg, while Russia's currency slid to the lowest level in almost seven months against the dollar. Credit-default swaps on Russian debt climbed 7 basis points, according to CMA Datavision prices in London, as President Dmitry Medvedev risked a deepening rift with the West by recognizing South Ossetia and Abkhazia.

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 followed a unanimous call by Russia's parliament to back the enclaves' aspirations for statehood in the aftermath of a five-day war that began on Aug. 8.

``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 5.3 percent to 1,560.14 at 4:19 p.m. in Moscow, extending its third-quarter drop to 32 percent. The ruble-denominated Micex Index slumped 3.3 percent to 1,276.47, the lowest level since September 2006.

VTB Group, Russian's second-biggest bank, plunged 6.3 percent to 6.42 kopeks, the lowest level since its initial public offering last year.

`Follow its Example'

``I signed decrees on the recognition by the Russian Federation of the independence of South Ossetia and Abkhazia,'' Medvedev said on television from Sochi today. ``Russia calls on other states to follow its example.''

OAO Gazprom, the country's biggest publicly traded company, sank for a third day, losing 2.7 percent to 226.50 rubles. Crude oil for October delivery fell as much as $2.75, or 2.4 percent, to $112.36 a barrel on the New York Mercantile Exchange.

Russia's ruble declined as much as 1.3 percent to 24.7676 to the dollar, the lowest since Feb. 7.

`Prolonged Period'

``This adds to the uncertainty of doing business in Russia and so people are reducing their positions,'' said Lars Rasmussen, an emerging-markets analyst at Danske Bank A/S in Copenhagen. ``It now seems like this conflict could go on for a prolonged period.''

Credit-default swaps on Russian government debt rose 7 basis points from Aug. 22 to 135, according to CMA Datavision prices at 12 p.m. in London. Contracts on Gazprom rose 11 basis points to 267, CMA prices show.

Credit-default swaps, contracts conceived to protect bondholders against default, pay the buyer face value in exchange for the underlying securities or the cash equivalent should a company fail to adhere to its debt agreements. A rise indicates a deterioration in the perception of credit quality; a decline signals the opposite.

A basis point on a credit-default swap contract protecting $10 million of debt from default for five years is equivalent to $1,000 a year.

To contact the reporter on this story: William Mauldin in Moscow at wmauldin1@bloomberg.net; Emma O'Brien in Moscow at eobrien6@bloomberg.net.