RIO DE JANEIRO (Reuters) - Latin American stocks dropped on Friday before a weekend referendum in Ukraine's Crimea, with investors fearing increased tensions between the West and Russia that could result in economic sanctions against Moscow and possibly a war in the region.
The heightened geopolitical frictions have hit financial markets across the globe, sending MSCI's benchmark stock index for emerging markets 0.6 percent lower. Russian stock indexes on Friday fell to their lowest levels since 2009 before clawing back some ground.
The Latin American portion of the MSCI index slid 0.5 percent, putting it on track to post a 3 percent loss for the week.
"Tensions with Russia regarding Crimea are likely to escalate next week," Barclays' analysts wrote in a research note, adding that investors will be monitoring whether possible sanctions against Russia would involve less aggressive actions such as visa bans and asset freezes or whether they could escalate to trade restrictions.
"The latter would have greater negative ramifications for Russia and, possibly, global markets. This is not our baseline scenario, but the situation is clearly fluid," they said.
The referendum in Crimea, arranged after mass protests toppled pro-Russian Ukrainian President Viktor Yanukovich, is expected to win popular approval for Crimea to become part of Russia.
In Brazil, the benchmark Bovespa index dropped 0.7 percent as investors grew averse to risk. Also weighing on the index were shares of power utilities, which slid as investors considered that a government plan unveiled late on Thursday to help electricity distributors struggling with high power costs failed to address the core problem.
The plan, which avoided increases in energy fares to consumers this year by allowing to country's electricity clearing house to seek private financing, did not address "an imbalance of supply and demand" and did not allay rationing risks, JP Morgan's analysts Fabio Akira and Cassian Fernandez wrote in a note.
Shares of Cia Energética de Minas Gerais SA, or Cemig, sank more than 4 percent while the country's power sector index dropped over 2 percent.
Cushioning losses in the Bovespa index were shares of steelmakers Companhia Siderúrgica Nacional and Gerdau, which recovered part of recent declines that were triggered by a steep fall in prices of metals over the past few days. JP Morgan recommended investors to "overweight" both companies in their portfolios saying the stocks looked cheap.
In Mexico, the IPC stock index fell 0.4 percent as shares of cement maker Cemex dropped nearly 3 percent.
Chile's benchmark stock indexes were little changed, however, after the central bank suggested it could further cut interest rates to support the economy after reducing the country's key interest rate by 25 basis points to 4.0 percent late on Thursday.
Despite the weakness in stocks, Latin American currencies were steady to stronger as investors considered their recent sell-off overdone for now.
Editing by W Simon