The Russian stock market plunged to its lowest levels since fall 2006 on August 8, partially because of poor trends on other markets, but mainly due to geopolitical risks related to the conflict between Georgia and South Ossetia, which could suck Russia in as well. Benchmark stocks plummeted 4%-9.9% on Friday. The RTS index plunged 6.51% to 1722.71, while the MICEX stock index dropped 5.25% to 1359.62, the lowest it has been since September 2006.

The RTS tumbled 11.3% for the week, its biggest drop in one week since May 2006, while the MICEX index fell 8.9%.

RTS futures fell 3.8 points, an indication of the negative outlooks among speculators.

Rosneft led the slide due to falling oil prices, falling 9.9% on the RTS and 7.8% on the MICEX.

Other stocks falling included Gazprom - down 5.2% on the MICEX, VTB Bank - 6.1%, MMC Norilsk Nickel - 4.1%, Lukoil - 5.5%, Gazprom Neft - 6.1%, Sberbank - 6.6%, Surgutneftegas - 6.6%, Tatneft - 3.9%, Transneft - 7.3% and Polyus Gold - 7.3%.

The plunge seen on the Russian market was also the result of negative trends on global markets, in particular Europe, as well as oil prices, which fell as the dollar's exchange rate posted significant gains against the euro.

Among second- and third-tier stocks, the biggest drops were seen by Vozrozhdenie Bank - down 9.4%, Mosenergosbyt - 9%, Avtovaz - 8.7% and OGK-2 - 8.2%.

Stocks posting gains included Irkutskenergo - up 2.3%, North-West Telecom - 1.6% and TGK-6 - 1.8%.

Total RTS Classic Trading came to $52.287 million on Friday, while MICEX Stock Exchange deals reached 53.462 billion rubles, led by Gazprom with 17.624 billion rubles in transactions.

The American Depository Receipts of Russian companies that are traded on the New York Stock Exchange fell by 5%-8% when trading opened on August 8.

Russian companies with ADR include Mechel coal and steel group, Wimm-Bill-Dann Foods, Mobile TeleSystems (MTS) and VimpelCom.

Analysts from investment companies and banks said the drop was mainly due to geopolitical risks posed by the conflict between Georgia and South Ossetia, which has sucked in Russia as well, although poor trends on other markets also played a role.

MTS stock was down 7.8% to $65.54 per ADR as of 5:52 p.m. Moscow time, while VimpelCom was down 7.4% to $22.5. Mechel's ADR plunged 8% when trading opened, although as of 5:52 p.m., it was only down 1.2% to $23.86. WBD stock was down 3.5% to $78.3 per ADR.

In the first economic steps, Russia will stop commercial air services with Georgia starting at Friday midnight, the Russian Transportation Ministry has said, resuming a ban on direct flights between the two countries only recently lifted.

Conflict

Russian heavy armored vehicles, including tanks, are reported to have entered to capital of the self-proclaimed republic of South Ossetia, Tskhinvali, which the South Ossetian authorities have said is under fire by Georgian warplanes.

Heavy shelling and large-caliber gunfire has been reported in the region all day.

Russia sent reinforcements to South Ossetia to help the Russian peacekeepers stationed there prevent bloodshed, the Russian Defense Ministry reported.

"The Russian peacekeepers, the citizens of the Russian Federation living in South Ossetia, and the citizens of the unrecognized republic itself will be provided with all essential aid. We will not allow the deaths of our fellow-countrymen and peacekeepers to go unpunished," the ministry said.

Many casualties have been reported, and with most South Ossetian holding Russian passports, Russian President Dmitry Medvedev issued a stern warning after a direct shelling of a peacekeeping barracks left Russian servicemen dead.

Russia will not allow the death of its compatriots in the Caucasus go unpunished, Medvedev said at an emergency meeting of the Security Council in the Kremlin.

"In line with the Constitution and with federal laws, my duty as Russian president is to safeguard the lives and dignity of Russian citizens, wherever they are. This is what is behind the logic of the steps we are undertaking now. We will not allow the deaths of our compatriots to go unpunished. Those guilty will receive due punishment," Medvedev said.

"The Georgian side's actions have resulted in human victims, among them Russian peacekeepers," Medvedev said.

"The situation has reached a point where peacekeepers on the Georgian side have been shooting at Russian peacekeepers, with whom their mission was to maintain the peace in the region," he said.

Civilians are dying in South Ossetia, Medvedev said. "And most of them are Russian citizens," he said.

Georgia last night launched military operations against the breakaway republic after a series of disturbances in the last week saying it wishes to remove the "criminal regime".

Georgian forces have continued their offensive since then, with Russia calling on the United Nations Security Council to demand an end to hostilities, but at press the Moscow-drafted document has so far failed to be endorsed by the United Kingdom and the United States.

Speaking in an interview with CNN, Georgian President Mikheil Saakashvili said Russia was fighting a war with Georgia on its own territory, fuelling further fear that all out conflict could be sparked in the volatile flashpoint region.

Georgia has claimed the Russian Air Force is shelling its territory, and has also said two Russian jets have been shot down, claims Moscow denies. Saakashvili earlier said any involvement of Russian forces in the conflict would result in a state of war.

Tskhinvali's losses are "in the thousands," Inal Pliyev, the head of the information department of the South Ossetian part of the Join Control Commission (JCC), told Interfax.

"Absolutely everything has been destroyed," said Pliyev.

"They used Grad [multiple rocket] systems to shoot at residential areas and a hospital. All businesses and organizations are on fire: schools, the university, the Culture Ministry, the parliament. The peacekeepers' city has been destroyed," said Pliyev.

"Our defenders have succeeded in taking out three Georgian tanks, which were in the city, and the Interior Ministry is now cleansing the city of armed individuals who have illegally entered it," he said.

The JCC official said most of the people who have been wounded sustained their wounds during air attacks.