Returning to Russian valuations: Politicophobia

MOSCOW (Reuters) - Wine goblets and vodka shot glasses are lined up untouched on long, vacant wooden tables at Genatsvale, one of many Georgian restaurants that pepper the Russian capital.

The St. Nicholas (Nikolskaya) Tower (L) and the History Museum are pictured in Moscow's Red Square January 18, 2008. REUTERS/Mikhail Voskresensky

In the candle-light, two groups of dark-haired Georgian women and a young Russian couple ate from platters of stuffed aubergines, pomegranate and chargrilled meat. But the usual Friday night musicians and cacophony of laughter were absent.

Russia’s brief but intense war with its tiny neighbor Georgia has left Muscovites too proud to eat the Georgian food that makes up much of the culinary fabric of the city, restaurant owners say.

But they are not the only ones worrying: investors are also unnerved by the aftermath of the five-day war in early August.

Russian shares have lost about a third of their value since hitting record highs in May. Russian and Western bank analysts polled by Reuters have cut forecasts for Russia’s gold and foreign exchange reserves.

As much as $25 billion in foreign capital may have left Russia since the Georgia conflict started, they said: while their growth forecasts were little changed at 7.5 percent, the crisis sharply cut the liquidity of the banking system.

Russian consumers may be proud of their government’s assertiveness -- and Moscow’s cafe society has lost none of its confidence -- but the new investment season after the summer lull began with more of a whimper than a bang.

The stock exchange’s benchmark RTS index, over half of it populated by oil and gas stocks which could have offered strong ‘buy’ opportunities for those keen to ride high energy prices, suffered its biggest decline since the financial crisis in 1998.

Armine Guledjian, vice-president of Halcyon Power Investment Company and a native Californian, has spent the last month speaking with potential European investors to fight cooling interest as relations soured between Russia and the West.

“Surprisingly, we are seeing some interest, but not much,” said Guledjian, who came to Moscow a year ago to work at the electricity-focused fund, which set up shop in Moscow four years ago and has more than $200 million invested in Russia.

“This is a great time to invest, as markets are so low, but for that same reason, few people have the guts to buy now,” she said.

Investors face a dilemma: should they join the exodus as Russia’s foreign policy draws fire from Western governments, or bet on President Dmitry Medvedev’s pledges to weed out corruption and build Russia’s $1.3 trillion economy into the world’s fifth-largest, from its current rank of 11th.

“Politicophobia, or the fear of actions by politicians, Russian and Western, is now a very real element in valuation models in the Russian asset class,” said Chris Weafer, chief strategist at Russian bank UralSib.

“The legacies of recent events are that they will have to factor in a higher risk premium based on politics than they do for other emerging markets.”

In other words, in return for taking the extra risk of placing long-term bets on Russian assets in a politically volatile climate, investors demand that these deliver a higher return than Russia’s rivals.


Prime Minister Vladimir Putin said on Monday the Georgia conflict would have an insignificant impact on the Russian economy. He forecast net capital inflows of $30-40 billion for this year as a whole, in line with official pre-war estimates.

But some investors, already spooked by the struggles for power at oil firm TNK-BP, say they are pulling the plug on what they had previously viewed as a risk worth taking.

“I have assets in both Georgia and Russia and I’m going to get out. What seemed a great idea at that time has become a sort of disaster,” said a 31-year-old banker at one of the world’s top 10 investment banks, who -- like most here -- spoke on condition of anonymity.

The Hong Kong-based banker also said he was making plans to sell the ultra-modern Moscow flat near Red Square that he bought two and a half years ago, convinced at the time of the returns and profit Russia would bring him.

Analysts may cast the war in Georgia and subsequent market reaction as an investment test for President Medvedev, a 42-year-old ex-lawyer who took office in May, but for some, it’s already too late.

“There’s no room for heroes in this market,” said a 54-year-old Briton in the Russian oil market, who also spoke on condition of anonymity. He started working in Russia shortly after the Soviet Union collapsed in 1991, lost money in the 1998 crash and expects a similar -- but worse -- rout this time round.

“It (the investment climate) is worsening and we’ll soon see a downward spiral that will result in another crash -- give it a few months.”

Where in 1998, Russia needed funds and support from Western countries riding a tide of globalization, now their energy-hungry governments have a marked need for Russia’s resources.

European Union leaders agreed in an emergency summit on Monday to postpone talks with Russia on a new partnership pact scheduled for later this month if Moscow has not withdrawn its troops to pre-conflict positions in Georgia.

But no economic sanctions were agreed, and Russian officials have said Moscow was doing everything to ensure stable oil supplies to Europe.

While this might ease concerns, the caution remains.

“As tensions continue to rise, possible negative reactions from Moscow include ... more restrictions on U.S. trade with Russia and a short, symbolic oil or gas supply cut to Europe,” said Tanya Costello of Eurasia Group in London in a note on Tuesday.

Additional reporting by Simon Shuster; Editing by Sara Ledwith