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Sept. 29, 2008, 4:20 p.m. EDT

Russian equities fall on drop in oil, risk aversion

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By Polya Lesova, MarketWatch

NEW YORK (MarketWatch) -- Russian stocks fell sharply Monday, joining a broad sell-off in emerging markets, as tumbling oil prices and mounting worries about the global financial crisis pushed the RTS stock index down 7%.

In Moscow, the dollar-denominated RTS stock index fell 7.1% to end at 1,194 points. The ruble-denominated Micex stock index dropped 5.5% to finish at 1,019 points.

After the close of trading in Moscow, the U.S. House of Representatives rejected the $700 billion bailout plan for the financial sector, sending U.S. equities into a free fall.

The Dow Jones Industrial Average /zigman2/quotes/210598065/realtime DJIA +0.15% tumbled 777.60 points, or 7%, to end at 10,365 points, its biggest ever point loss. See Market Snapshot.

The Market-Vectors Russia ETF , which tracks the performance of the Russian stock market, tumbled 16.5%. Russian equities joined a broad-based sell-off in emerging markets on Monday. See Emerging Markets Report.

'There is no liquidity in the emerging-markets system; it's a very critical situation, and in terms of that, the most leveraged countries are most at risk here.'

Lars Christensen, Danske Bank

Declines in oil and gas stocks as well as financials led the RTS market lower. The RTS Oil and Gas index dropped 7.6%, weighed down by tumbling oil prices.

November crude closed with a loss of $10.52, or 9.8%, at $96.37 per barrel Monday on the New York Mercantile Exchange. See Futures Movers.

The RTS Financials index ended down 4.7%, with shares of Sberbank and VTB Bank leading the losses.

"There is no liquidity in the emerging-markets system; it's a very critical situation, and in terms of that, the most leveraged countries are most at risk here," said Lars Christensen, chief analyst at Danske Bank. "The banking sector in Russia is very leveraged."

Prime Minister Vladimir Putin said Monday that state-controlled Vnesheconombank would disburse up to $50 billion to Russian banks and financial institutions to help them meet their foreign liabilities, RIA Novosti reported.

Putin also said that the Russian government has decided to set aside around $10 billion of budget funds in 2008 and 2009 to support the Russian stock market, according to RIA Novosti.


The first 75 billion rubles, or $3 billion, will be allocated from the 2008 budget to boost Vnesheconombank's capital, Putin indicated, according to the report.

The RTS stock index has fallen 48% this year, making it one of the worst performers among global emerging markets. Sharp drops in Russian share prices have sparked fears of a replay of the country's 1998 financial crisis.

Investors have pulled billions of dollars out of Russia on concerns over the global credit crisis, falling oil prices and state interference in the economy, as well as escalating geopolitical tensions with the West after the military conflict between Georgia and Russia.

"Should a global recession unfold, the investment case for Russia would deteriorate, due mainly to the negative impact of assumed lower oil prices on the energy sector," said Peter Westin, a strategist at J.P. Morgan, in a research report Monday. "In this environment, investors, in our view, would have to become increasingly selective."

The best opportunities will likely to lie in selected financials, media and utilities, while investors should be cautious on energy and steer clear of real estate, according to J.P. Morgan.

Among the catalysts for a Russian stock-market recovery could be stabilization in oil prices, signs of easing inflation and improved liquidity conditions, Westin said.

"Furthermore, a major catalyst for world markets would be signs that a global recession is avoidable," the strategist added. "This would increase risk appetite among investors, a prerequisite for flows into emerging markets, including Russia."

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June 8, 2023 10:38a

Polya Lesova is a New York-based reporter for MarketWatch.

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