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Russia foreign investors unfazed by rows with West PDF Print E-mail
Monday, 12 May 2008

REUTERS, LONDON - With oil at more than $125 per barrel and growth booming, foreign investors in Russia are finding it easy to turn a blind eye to the expulsion of U.S. diplomats and increasingly bellicose rhetoric over Georgia.

Moscow expelled two U.S. military attaches on Thursday following the ouster in recent months of two Russian diplomats from Washington, with the United States also criticizing the war of words with neighbor Georgia.

A Georgian minister said his country was "very close" to war with Russia after its neighbor sent more troops to the breakaway Georgian region of Abkhazia, where separatist rebels said on Thursday they had shot down another pilotless Georgians spy drone.

Some investors said even if war were imminent -- rather than simply more rhetoric -- it might not be enough to put them off Russia as the country benefits from record oil prices in excess of $125 a barrel, pushing growth to 9.5 percent a year.

"Unless the Americans were to send peacekeepers to defend the Georgians I cannot see it having much of an impact," said George Nianias, chairman of Denholm Hall which has some $400 million in fixed income investments in Russia.

"Russia is too big, too important and too dangerous for the West to ever risk anything like that. You could see a local conflict with Georgia and the guns actually start to fire without it deterring anyone."

In contrast, Georgia has already suffered a ratings outlook downgrade from agency Standard & Poor's over rising tensions with its neighbor, and fellow ratings agency Fitch has warned any conflict -- unlikely though it is seen -- would lead to a downgrade for Georgia but not Russia.

RISKIER THAN BRAZIL?

"It is something I'm definitely watching on Georgia," said one fund manager who holds a small amount of Georgia's $500 million Eurobond issued last month and did not want to be quoted because they were not authorized to speak to the media. "But it's definitely not something that changes my view on Russia at all."

But head of Fitch emerging Europe sovereigns Edward Parker said an increase in tension between Russia and the West arising from Georgia could ultimately impact Russian firms by pushing away investors already made wary of risk by the credit crunch.

"They have quite significant private sector amortizations (debt) falling due and this could make it more difficult to refinance," he said, making any conflict with Georgia potentially more significant than Russia's long-running war in Chechnya, which had almost no investor impact.

For some investors, the risk of conflict with its neighbors is one of the factors that makes Russia less appealing than some other key emerging markets.

"Conflict with its neighbors is a concern that makes it less appealing investment destination than, for example, Brazil where you have the growth story without the political risk," said Jason Hepner, investment director for global strategy at Standard Life Investments.

"UNAPPEALING HEADLINES"

Standard Life does not break down investments publicly, but manages some $280 billion globally including in Russia.

The transition of power from the President Vladimir Putin to his anointed successor Dmitry Medvedev, sworn in this week, is seen making relatively little difference with Putin still in the background as Prime Minister.

Some investors say that after the arrest and imprisonment of Russia's richest man Mikhail Khordorkovsky and dismantlement of his multibillion-dollar oil company YUKOS, they have become hardened to political risk and still see good potential profits.

But since then, most have steered clear of the oil and energy field, preferring to target investments on other sectors such as construction and retail to tap wider growth -- seen less likely to attract state intervention.

They say any repeat of the YUKOS affair, perhaps in another sector, would worry foreign players -- but they largely shrug off reported human rights worries..

Analysts say a political row between Russia and Britain over the radioactive poisoning of dissident Alexander Litvinenko -- with Russia refusing to extradite the chief suspect and his family accusing the state of murder -- had no impact on investment flows.

Britain-based investors continued to put money into a range of Russian assets, while Russian money including from the country's rapidly growing oil-fuelled sovereign wealth fund continued to flow into the West.

Russia's sovereign wealth fund is estimated to be the second largest in the world after China's, while last month the number of Russian firms listed on the London stock exchange passed 100.

"They're obviously not appealing headlines but at the same time they seem to be the continuation of a trend and they don't change the overall picture as such," said Standard Life 's Hepner. "Although obviously if they become more frequent that is a worry."

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