Emerging Markets : Heavy-Handed Tactics Cause International Alarm




Russia’s actions in South Ossetia exacerbated a stock market slide.

Russian markets have been in turmoil for a month after the country signaled its intent to move back up the geopolitical pecking order by marching its troops into the breakaway region of South Ossetia in the Caucasus country of Georgia. While it remains unclear whether Russia or Georgia initiated the conflict, Georgian president Mikheil Saakashvili clearly won the subsequent public relations battle, giving non-stop interviews to international news agencies to decry Russian aggression. The European Union stepped in to mediate, and a month later Russian forces were in the process of withdrawing, although not until after US secretary of state Condoleezza Rice warned Russia that it would face international isolation if it did not accept a cease-fire deal.

The conflict highlighted deep-seated Russian aversion to the prospect of nations in its backyard—the most important of which is Ukraine—joining NATO and otherwise cozying up too much to the West. The war further soured investors on Russia, coming weeks after prime minister Vladimir Putin raised concerns that the Kremlin would play an increasing role in corporate Russia when he publicly criticized mining and metals company Mechel in July. By mid-September Russian equity indexes had plunged nearly 50% from their springtime highs, as elevated perceived risk—in a backdrop of dropping commodities prices and global market uncertainty—spurred investors to flee.

In a slightly better development for investors, the long-running battle between oil major BP and its Russian partners over control of the TNK-BP oil joint venture appeared to finally come to an end when the two parties agreed to launch an IPO of TNK-BP and to change senior management. There are few doubts that the Russian partners in the arrangement got the better end of the deal, though, and in the eyes of international investors the episode amounted to yet another cautionary tale of the pitfalls of doing business in Russia. Days later, Rupert Murdoch’s Outdoor News came under regulatory scrutiny, not long after Murdoch expressed his doubts in the international press about Russia as an investment destination.

Kim Iskyan