Russia: will war scare off investors?

published 15 August 2008

"We didn't need this" is how Ivan Mazalov of Prosperity Capital Management reacted to Russia's incursion into Georgia. "It's not going to break the Russian economy, but war is bad for investor sentiment." Russia's latest military foray is a stark reminder of the political risks involved in emerging markets. But big cracks were appearing in the Russian economy well before this week's events. The Micex, Russia's main stockmarket index, is down nearly 30% on last May's peak. That's partly down to double-digit inflation, and fears over GDP growth, which is expected to fall this year from 8.1% in 2007.

But the big worry is oil, which, along with gas, accounts for around 60% of state revenue. The price has already fallen around 20% from its recent peak. It's not enough "to change the geopolitical balance", says Edward Hadas on Breakingviews, but "the downward momentum appears too strong to be stopped", adding to the woes of an economy "where around 75% of exports are commodities". The situation in Georgia merely makes Russia even less attractive to increasingly risk-averse investors. As Alfa Bank's Ronald Smith says, "when we get one reason to sell after another, people start throwing in the towel".