RUSSIAN ASSAULT RAISES MARKET RISKS
By Dan Dorfman, dandordan@aol.com

New York Sun
United States
August 15, 2008

For the moment, at least, Wall Street is greeting the Russian invasion
of Georgia and the Kremlin’s broken promises of a cease-fire and
a withdrawal of its troops from the former Soviet state as just
ho-hum. Oil prices, in particular, have been falling despite the
invasion, with light, sweet crude down $0.99 yesterday, to close at
$115 a barrel on the New York Mercantile Exchange.

A former Merrill Lynch strategist, Bill Rhodes, argues that Wall
Street’s dismissal of the burgeoning conflict in Georgia is a
mistake. "The situation is a matter of considerable concern and bears
close watching because it raises an obvious question: How far is
Russia ready to go?" he says. "Is there yet another Russian assault
to come, such as in Azerbaijan, Ukraine, or Armenia? Or maybe the
Baltic states?"

While Wall Street, which is still reeling from the shock of a serious
liquidity squeeze, views the invasion as a nonevent, Mr. Rhodes,
who heads up the Boston-based institutional adviser Rhodes Analytics,
says that "the market would react sharply if there’s another Russian
military action." Another invasion, he says, "wouldn’t also be looked
upon as a nonevent."

At press time, Russian troops within Georgia were still occupying
the city of Gori, the birthplace of Josef Stalin.

One of Georgia’s big economic enticements is the world’s second
biggest pipeline, a key transit point for oil to Europe and America
from the Caspian region. The pipeline, which delivers an estimated
800,000 barrels a day, or about 1% of the world’s supply, starts in
Azerbaijan and extends to Turkey, where the oil is loaded on boats
for transportation across the Mediterranean.

An energy consultant at West Coast liquidity tracker TrimTabs
Investment Research, Bob Berke, says an explosive situation could
develop. Russia could easily destroy the pipeline if it wanted to,
and "if it did," he says, "it would be an act of war against Europe
and America, all hell would break loose, and it would likely drive
up the price of oil to about $170 a barrel."

A London-based money manager, Raymond Stahler, views Russia’s refusal
to honor its promises of both a truce and a cease-fire in Georgia as a
clear message that it intends to reassert itself as a more prominent
and forceful player on the world stage, which he believes is apt to
create more international tensions. "Since no one at this time will
stand up to them, at least militarily, I think we’re likely to see
increasing Russian use of military force and additional support of the
West’s enemies, including sponsors of terrorism," he says. "In short,
it’s a rebirth of the Cold War."

Mr. Stahler, who is a principal of Stahler Dearborn Ltd., also thinks
Georgia’s problems with Russia may be far from over, especially
since Prime Minister Putin has made it clear he firmly opposes the
pro-Western Georgian government and its desire to join the North
Atlantic Treaty Organization.

This conflict, in addition to Mr. Putin’s personal disagreements
with some prominent Russian business leaders and widespread internal
corruption at the local government level, raises questions about the
stability and goals of Russia’s leadership and putting money to work
in the Russian stock market.

Money manager John Connor, who about a decade ago created the Third
Millennium Russia Fund, which in the past five years has posted an
impressive 33% annual growth rate, takes a far less ominous view
of the invasion. "It’s more of a geopolitical game, essentially a
warning to both America and NATO," he says. "Georgia started something,
and Russia started something bigger."

Mr. Connor expects the Russian-Georgian crisis to be resolved within
a few weeks, owing to international pressure, with Russia returning
the territory to Georgia. He also expects Mr. Putin, whom he describes
as "a pretty smart guy, but who is cranky and shoots from the hip,"
to retire in a year or two and let President Medvedev, his former
chief of staff, run the show.

This year, Mr. Connor’s fund, which has assets of $120 million, is on
the losing side, as the Russian market — stung by a reflection of
the meltdown of stock markets around the globe, falling oil prices,
and the Georgian crisis — has fallen about 23%. The fund itself is
down about 20%, after having been up 8% at the end of June.

Mr. Connor acknowledges that investing in Russia isn’t for widows
and orphans, but "you’re getting a great return for high risk and
for putting up with a lot," he says. He points in particular to
such positives as lofty 8% economic growth, a strong currency, lots
of undervalued stocks, big dividends (many in the 6% to 9% range),
and an average low price-to-earnings market multiple of eight.

Some of his top picks include Russia’s biggest bank, Sberbank,
telecommunications giants VimpelCom and Mobile TeleSystems, and
fertilizer producer UralKali.

The bottom line: Is Mr. Putin, as some speculate, trying to re-create
the Soviet Union? If so, as one trader put it, "they should change
the name of the James Bond film to ‘From Russia Without Love.’"