Caucasus conflict deals blow to Russian investment

By Robin Paxton and Melissa Akin - Analysis

MOSCOW (Reuters) - President Dmitry Medvedev's investment case for Russia has been dealt another blow as the Kremlin's recognition of rebel regions in Georgia provokes a stand-off with the West, adding pressure to stocks.

Russian shares have lost over a third of their value since May's record highs and Cold War comparisons are scaring off investors already spooked by a government attack on coal miner Mechel and a shareholder battle at oil giant BP's Russian joint venture TNK-BP.

This leaves investors with a dilemma: to join the exodus as Russia's foreign policy draws fire from Western governments, or to bet on Medvedev's pledges to weed out corruption and build Russia's $1.3 trillion (710 billion pound) economy into the world's fifth-largest from its current rank of 11th.

"The whirlwind crescendo of bad news seems never-ending. But the lower this market goes, the more attractive it becomes for fundamental-based investors who have a longer-term horizon," said Erik DePoy, strategist at Alfa-Bank in Moscow.

Some analysts put Russia's forward price earnings ratio as low as five times, lower than any other major emerging market.

But however appealing investors may find a cheap asset in an oil-rich country, they want a sign that a new Cold War is not on the cards before they commit scarce money.

"An important trigger might be the EU summit planned for next Monday, at which the EU will formulate its response to Russia's actions in Georgia and recognition of South Ossetia," UralSib strategist Chris Weafer said.

"If that is tough but still only rhetoric, we could see the market rally. I don't think anyone would care if there is harsh language used. What investors will hope not to see is a move toward sanctions or restrictions against Russia."