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Russian Markets and Currency Hit by Georgian Conflict

Russia's currency and stock market have suffered substantial losses since the outbreak of hostilities in Georgia three weeks ago. VOA Moscow correspondent Peter Fedynsky reports investors are nervous going into the weekend over the possibility that European heads of state may apply sanctions against Russia during a special summit on Monday to discuss the Georgian crisis.

Russia's RTS Index of leading stocks fell more than six percent the day hostilities broke out in Georgia and reached their lowest point in nearly two years when President Dmitri Medvedev formally recognized the independence of Abkhazia and South Ossetia.

Bloomberg News reports the Russian ruble is headed for its biggest monthly decline against the U.S. dollar in more than nine years as investors reduce their Russian holdings. In addition, Russia's Central Bank says the country lost more than $16 billion in the week following the launch of military operations in Georgia on August 8. Financial observers attribute the loss to nervous investors pulling capital from Russia.

The RTS index reached its peak in April and has been ratcheting down since. Timur Nazardinov, chief trader at the Troika Dialogue Investment Bank in Moscow says the Georgian conflict accelerated the decline.

Nazardinov says events in Georgia brought uncertainty into the market, which naturally reacted negatively. He adds that investors witnessed declines of five to ten percent in the course of a day and the market reached bottom on Tuesday when President Medvedev recognized South Ossetian and Abkhaz independence.

Nazardinov notes the market experienced a late session rally that day as investors bought stocks at bargain prices. But Russian stocks going into the weekend are mostly down. The stock trader says there is some nervousness ahead of Monday's special EU summit to discuss a European response to the Georgian crisis.

French Foreign Minister Bernard Kouchner said Thursday that Europe may apply sanctions against Russia. While a source in the office of French President Sarkozy now says that sanctions will not be considered, Timur Nazardinov says the very mention of them has made investors nervous.

He says the word sanctions is a considerable negative on the market, and if the summit imposes serious measures, then the market will, at the very least, fall to those minimum levels seen two or three days ago, if not worse.

But Sergei Karykhalin, chief analyst at the Capital Investment Bank in Moscow is not concerned about any negative Western influence on Russia, because he has confidence that Kremlin leaders factored possible retaliation into their overall strategy.

Karykhalin says Russian leadership added everything up and concluded that the United States and Europe cannot inflict any painful measures on the country, because it supplies Europe with 40 percent of its natural gas and is probably the world's number two oil producer behind Saudi Arabia. For that reason, Karykhalin says very few levers can be used to influence Russia.

But Timur Nazardinov notes the Russian market has not had any influx of fresh capital for about six months. Analysts say Western concerns about investing in Russia could complicate Kremlin plans to modernize and diversify the country's economy, which currently relies on the commodity trade, particularly the sale of oil and gas.