Georgia conflict casts shadow for investors

By Peter Apps - Analysis

LONDON (Reuters) - The sudden outbreak of the Georgian conflict has left investors looking nervously at other economies in the region, with Ukraine and the Baltic states seen particularly exposed to a resurgent oil-rich Russia.

Russian equities and the rouble have already fallen on the conflict, while Georgia has faced credit ratings downgrades and is seen likely to suffer further economic fallout even if the actual fighting ends quickly.

"Going to war with Russia is bad for your creditworthiness, to put it mildly," said Edward Parker, head of emerging European sovereigns and ratings agency Fitch.

"I don't think what has happened substantially changes the fundamentals for other countries but it may be a wake-up call to some people who hadn't properly appreciated potential Russian impact in the region," he said, adding he did not expect any broader ratings impact outside Georgia.

Outside the two main combatants, investors see the most exposed countries as Georgia's fellow former Soviet states bordering Russia, such as Ukraine, the Baltic states and some central Asian countries.

"You'd expect this to affect sentiment towards them, as it is more evidence of Russia trying to exert control over its nearest neighbours," said Andrew Brown, who helps manage $10 billion of emerging equity for Aberdeen Asset Management.

Russia cut off gas supplies to Ukraine in January 2006, while Baltic states Lithuania and Estonia have both been hit by cyber attacks on government websites. Lithuania's attacks followed a ban on the use of Soviet symbols, while Estonia linked its attacks to a dispute with Moscow over the removal of a statue of a Red Army soldier from a square in the capital.

By the end of Friday, the cost of insuring Ukrainian debt through the credit default swaps market had increased to 402 basis points from 390 in July, implying that it was seen as riskier by traders -- although it narrowed again on Tuesday.