Monday, 18 August 2008

Letter from Moscow

Dow Jones 'Financial News'

By Jason Corcoran in Moscow

Frazzled Russian investors have seen their domestic markets zigzag up and down like an erratic heartbeat on a cardiac monitor for the past month.

The RTS, the benchmark for foreign investors, plummeted by 6.5% to 1722 on August 7 after the outbreak of hostilities in the Georgian breakaway region of South Ossetia while the rouble-denominated Micex index slid by 5.3% to 1360.

The falling markets were resuscitated by Thursday last week after Russian President Dmitry Medvedev halted the invasion of Georgia and called an end to the fighting. The RTS rebounded to around its previous level, passing 1800 by the end of Thursday. The Micex closed at 1445, up 2.3% on the day.

The RTS had seen its value knocked by 24%, or $63bn, on July 24 after Prime Minister Vladimir Putin accused domestic mining company Mechel of price fixing and evading taxes. A few days later, Medvedev stepped in with the defibrillator to assure investors that the country’s stock market remained “one of the most attractive in the world”.

Medvedev appears to be playing good cop to Putin’s bad cop; the President steps in with honeyed words to ease investors’ concerns after the gung-ho Prime Minister has waded in and put the frighteners on everyone.

In Georgia, the roles seem to be reversed with President Mikheil Saakashvili playing the rabble-rousing antagoniser and his Prime Minister, Lado Gurgenidze, acting to soothe investors’ nerves.

The English-speaking Georgian double-act has been honed for the western media. Within hours of the outbreak in South Ossetia, the Bank of Georgia’s investment banking arm, Galt & Taggart, had organised a conference call between Gurgenidze and the country’s biggest investors and rating agencies.

In a live discussion with UBS and other banks, Gurgenidze described the political situation in Georgia and South Ossetia, and spoke about the perceived negligible impact on the domestic economy.

Gurgenidze knows more than most how capital markets respond to political crises, having worked at ABN Amro in various roles, including in its corporate finance department and as head of mergers and acquisitions for emerging European markets.

After Georgia’s Rose Revolution in 2003, Gurgenidze returned to his homeland as chief executive of the London-listed Bank of Georgia.

The bank has been a darling for frontier market investors with some Moscow-based hedge funds notching up a 1,000% return on their original investment. Gurgenidze has even built a celebrity name for himself after hosting Georgia’s version of Sir Alan Sugar’s The Apprentice television programme. Saakashvili nominated him as Prime Minister in November last year shortly after violence erupted on the streets of the capital following disputed election results.

Since the Rose Revolution brought Saakashvili to power, Georgia has become one of the most dynamic countries in the former Soviet Union.

Several reforms have begun to bear fruit, and have been hailed by international financial institutions such as the World Bank. Georgia’s growth stood at more than 10% in 2006 and last year and is expected to be around 8% this year.

Saakashvili and Gurgenidze may have won the heart and minds of the media, but the damage to Georgia’s investment credibility from its military humiliation is incalculable. The country is now counting its dead and licking its economic wounds.

Credit rating agency Fitch has downgraded Georgia’s sovereign debt as a result of the conflict. It has also downgraded the credit outlook for the Bank of Georgia, ProCredit Bank and TBC Bank from “stable” to “negative”.

Meanwhile, it remains unclear whether Medvedev and Putin’s unwieldy presentation of the war will damage Russia’s investment case in the longer term.

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