Russia's Market Plunge May Temper Medvedev's Georgia Moves

By Henry Meyer

Sept. 15 (Bloomberg) -- When it comes to containing Russia, the invisible hand of the markets may be the West's most potent weapon.

Tightening access to international credit and mounting stock losses are hurting Russian billionaires as well as state- owned corporations, prompting calls by businessmen to heed Western complaints over Kremlin policy in Georgia.

The country's biggest business association, the Russian Union of Industrialists and Entrepreneurs, will raise the issue today at a meeting with President Dmitry Medvedev, said Igor Yurgens, a board member and adviser to Medvedev.

``This is a natural alarm clock,'' Yurgens said in an interview. ``It's a concern to big owners, it's a concern to the Russian economy. There are limits to what Russia can do alone if it chooses to be isolated.''

After rejecting Western appeals not to recognize breakaway Georgian regions, Medvedev last week signaled compromise for the first time. He agreed to implement a European Union- brokered cease-fire and pull troops back into the disputed territories of South Ossetia and Abkhazia.

Last month's five-day war, triggered by Georgia's effort to retake South Ossetia, sent equity, debt and currency markets reeling, reflecting investor worries that commercial ties would fray.

Feeling a `Jolt'

Finance Minister Alexei Kudrin acknowledged the impact Sept. 11, saying Russian companies felt a ``jolt'' as reaction to the war added to the fallout from turmoil in global financial markets. Medvedev called for officials to do ``everything necessary'' to attract capital. Central-bank chairman Sergey Ignatiev said the bank was taking ``massive measures'' to provide extra funds to lenders.

The U.S. dollar-denominated RTS index has plunged more than a quarter since war broke out Aug. 7 -- even after a 3.3 percent bounce Sept. 12 -- putting its loss since July 1 at 42 percent. The ruble is close to a 13-month-low and investors have pulled $35 billion from Russia since the war, according to BNP Paribas SA. That is the worst capital flight since the 1998 debt default; the cost to insure against default has risen to a four-year high.

That's making it pricier for the two biggest energy companies, OAO Gazprom, where First Deputy Prime Minister Viktor Zubkov succeeded Medvedev, 43, as chairman, and OAO Rosneft, whose chairman is Deputy Prime Minister Igor Sechin, to borrow abroad.

Sberbank Loan

State-run OAO Sberbank, Russia's largest bank, was the first Russian company to price a loan since the war. To borrow $1.2 billion, it was forced to pay almost double the interest- rate margin above the London interbank offered rate that it paid in November, or 85 basis points.

Among those feeling the pinch are the owner of steelmaker OAO Severstal, Alexei Mordashov, who was listed as the world's 18th richest person with $21.2 billion by Forbes magazine in May. The value of his stake in the company is some $2 billion, or 15 percent, lower than it was before Aug. 7, putting it at about $12 billion.

``The government will soften its stance because Gazprom needs to refinance, Rosneft too,'' said Irina Yassina, a researcher at the Moscow-based Institute for Economy in Transition. ``This isn't just a question of national security, it's a matter of personal wealth of top officials.''

While losses have mounted, complaints have been muted. The reluctance of those with the most at stake to criticize the government stems from the fate of Mikhail Khodorkovsky, once Russia's richest man.

Prison

Khodorkovsky is now serving an eight-year prison term for fraud and tax evasion, charges he blames on his political opposition to Vladimir Putin, 55, then Russia's president, now its prime minister, and still the paramount source of political power in the country.

Alexander Lebedev, a billionaire who owns 30 percent of OAO Aeroflot, says the government has intimidated even the wealthy into silence. ``Businessmen are frightened,'' Lebedev, whose stake in the airline is worth some $190 million less than before the conflict, said in an interview.

While he criticized the government's ``stupid, militaristic rhetoric'' since the war, he said he had no means to convey his concerns. But the need for action is urgent, Lebedev said: ``There is panic on the markets, liquidity has practically dried up.''

Billionaire Vladimir Potanin, the main shareholder in OAO GMK Norilsk Nickel, the biggest mining concern, complained to Medvedev last month about the credit squeeze, state-owned news agency Itar-Tass reported. Sergei Porshakov, an official at Potanin's holding company Interros, confirmed the meeting with Medvedev, though he declined further comment.

Unyielding

Rhetoric from Russia's leaders has remained unyielding as U.S. and European officials express concern over Russian aims in former Soviet states, particularly Ukraine.

Even with central-bank sales of dollars to prop up the ruble, Russia still has $573.6 billion of foreign reserves, the world's third-largest stockpile, giving it plenty of financial ammunition to withstand Western condemnation.

Yet investors say Russia, the world's biggest energy exporter, may have to curtail ambitions to broaden an economy now largely dependent on oil and gas.

``Unless they come to terms with what caused the market to collapse, they won't build the foundations for sustainable growth,'' said James Beadle, chief investment strategist at Pilgrim Asset Management in Moscow.

To contact the reporter on this story: Henry Meyer in Moscow at hmeyer4@bloomberg.net