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Ruble, Russian Stocks Fall as Putin begins war against Georgia

By William Mauldin and Emma O'Brien

Aug. 8 (Bloomberg) -- The ruble dropped the most in 3 1/2 years, Russia's Micex Index fell to a 22-month low and bond yields climbed after Prime Minister Vladimir Putin said ``war has started'' in the breakaway Georgian region of South Ossetia.

Credit-defaults swaps, a measure of bond risk, jumped the most this year after Georgia's Interior Ministry said jets bombed the towns of Gori and Kareli near South Ossetia. Yields on government bonds rose.

The ruble fell the most against the central bank's basket of dollars and euros since that gauge was introduced in February 2005. The Micex plummeted, bringing its decline this year to 28 percent after oil slid 20 percent from its July high. Russian ``volunteers'' are pouring over the border to help defend South Ossetia from Georgian forces, Putin told U.S. President George W. Bush in Beijing, according to Putin spokesman Dmitry Peskov.

``We didn't need this,'' said Ivan Mazalov, who helps manage $5 billion in shares of companies from the former Soviet Union at Prosperity Capital Management in Moscow. ``It's not going to break the Russian economy, but war is bad for investor sentiment.''

Bombings by Russian warplanes followed an attack by convoys from Russia on Georgian forces near the South Ossetian capital of Tskhinvali, Georgian Interior Ministry spokesman Shota Utiashvili said by phone today from Tbilisi, Georgia. Russia's government earlier denied the bombing claim, and the Defense Ministry accused Georgia of ``unleashing a dirty, reckless scheme.''

`Last Nail'



The dispute between the countries ``adds to bruised investor sentiment'' in Russia and is ``potentially damaging to Russia's external relations, particularly with the West,'' JPMorgan Chase & Co. wrote in a note to investors. ``Clearly a war would not support investor confidence and would further fuel the debate about political risk.''

The ruble weakened as much as 1.3 percent against the dollar-euro basket and was at 29.7004 by 6:29 p.m. in Moscow, from 29.3585 yesterday. The basket mechanism was introduced as a way of limiting the impact of the ruble's fluctuations on the competitiveness of Russian exports. The dollar gained against most major currencies today.

``This is the last nail in the coffin,'' said David Tavadian, head of fixed income and derivative sales at Calyon Rusbank SA, a Moscow-based unit of Credit Agricole SA. Calyon's Russian loan book is worth $7 billion. ``It tells people that in Russia you have to be careful.''

The ruble-denominated Micex sank 5.3 percent to 1,359.62. The dollar-denominated RTS Index slumped 6.5 percent to 1,722.71, the biggest one-day drop in more than six months.

Energy companies retreated as oil headed for its fourth decline in five weeks, while Bank of Georgia tumbled in London.

Energy Stocks

Shares of Rosneft, the country's biggest oil producer, sank 7.4 percent to 207.04 rubles, extending its weekly decline to 14 percent. OAO Lukoil, the second-biggest oil producer, dropped 5.3 percent to 1,839.35 rubles. Oil and gas companies comprise about 55 percent of the Micex Index.

OAO Sberbank, the biggest bank in Russia, sank 6.2 percent to 60.14 rubles, its lowest in 21 months. Bank of Georgia, the republic's biggest bank, dropped 24 percent to $12 in London, a record low.

The perceived risk of holding Russian government debt jumped the most this year in the credit-default swap market. Contracts on the nation's bonds rose 15 basis points to 117, according to CMA Datavision prices at 3:55 p.m. in London.

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.

Bonds Drop

Credit-default swaps are financial instruments based on bonds and loans that are used to speculate on a country's ability to repay debt. They pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements.

Russian government bonds dropped. The benchmark 30-year note yielded 5.67 percent, up 5.5 basis points. The yield on the two- year 8.25 percent bond rose 6 basis points to 5.73 percent, the highest since March 11, according to ING Groep NV prices on Bloomberg. The difference in yield between Russian and U.S. two- year notes widened to 336 basis points, the widest since April.

A ``significant escalation or a prolonged conflict'' in Georgia would be ``likely'' to affect Georgia's credit rating, Edward Parker, emerging markets credit analyst at Fitch Ratings, said by telephone today.

Inter RAO

OAO Inter RAO, a Russian power generator with plants in Georgia, dropped 1.51 kopeks, or 19 percent, to 6.61 kopeks in Moscow. A kopek is one hundredth of a Russian ruble.

Inter RAO owns the Mtkvari Energetika power plant in Georgia, half of which is currently in operation. The company also has the AO Khrami GES-1 and GES-2 hydropower plants under trust management, which provide 110 megawatts, or 10 percent of Georgia's power production, according to the company's Web site.

OAO Polyus Gold, Russia's biggest gold producer, tumbled 66.8 rubles, or 6.9 percent, to 903.01 rubles. Gold fell to a three-month low in London on speculation dollar gains will spur sales by investors who bought the metal as an alternative.

To contact the reporters on this story: William Mauldin in Moscow at This email address is being protected from spambots. You need JavaScript enabled to view it.; Emma O'Brien in Moscow at This email address is being protected from spambots. You need JavaScript enabled to view it.

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