Russian Stocks Tumble to Three-Year Low as Debt Risk Climbs

By William Mauldin

Oct. 23 (Bloomberg) -- Russian stocks tumbled, erasing gains for this week, led by OAO Sberbank after the country's debt risk rose and its reserves fell for a third straight week.

Standard & Poor's cut the outlook for Russia's BBB+ credit rating to ``negative'' from ``stable,'' saying the country's rating could be downgraded if the cost of the government's bank- rescue operations increases.

The ruble-denominated Micex Index sank 5.4 percent to 594.18 at 3:35 p.m. in Moscow, the lowest since May 2005. The Micex Stock Exchange halted trading for an hour because of the slump. The dollar-based RTS Index dropped 2.4 percent to 650.07.

The yield on Russia's 30-year, 7.5 percent dollar notes increased 34 basis points to 11.32 percent. Credit-default swaps on Russian government debt, which protect bondholders from default, climbed to 1052.5 basis points, according to CMA Datavision prices. That's the highest level since 2001, according to Bloomberg data.

``The street is looking for protection at any price,'' said Constantin Demchenko, head of trading at Everest Asset Management in Moscow. ``The risk to equities should not be lower than that of the bonds, and with credit-default swaps jumping we should see equities falling. Any recovery would start from fixed income, not equities.''

Sberbank, Russia's biggest bank and holder of ruble deposits, slipped 2.2 rubles, or 8.6 percent, to 23.50 rubles, the lowest in three years. Bank Vozrozhdenie, a regional mortgage lender, dropped 2.9 percent to 315.50 rubles.

The Russian ruble weakened to its lowest level against the dollar in two years, falling to 26.99 to the dollar. Russia's international reserves, the world's third largest, fell $14.9 billion last week after the central bank sold currency to prop up the ruble. Reserves declined more than $15 billion in each of the two previous weeks.

August 1998

``There is a rumor racing through Russia that the government is about to devalue the ruble,'' said a report by Stratfor, a U.S.-based risk advisory group. ``Everyone in Russia remembers the outcome of the August 1998 ruble crisis, which dislocated the entire economy and seemed to reduce Russia from a slightly tattered but still proud superpower to a pathetic basket case in one harrowing week.''

Crude futures overnight dropped $5.43 to $66.75 a barrel in New York, the lowest settlement since June 2007. Russian equity benchmarks are dominated by oil and gas producers.

OAO Lukoil, Russia's second-biggest oil producer, sank 4.4 percent to 835.01 rubles. OAO Tatneft, the oil producer controlled by Russia's republic of Tatarstan, dropped 7.3 percent to 31.88 rubles.

Credit-default swaps protect bondholders against default by paying the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements. An increase indicates deterioration in the perception of credit quality.

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