Sept. 5 (Bloomberg) -- Russian stocks plunged and the cost to protect government bonds from default jumped to the highest in four years after the central bank shored up the ruble.

Bank Rossii said today it intervened, buying rubles from its foreign currency reserves, after withdrawals by investors sent the currency to its lowest level in almost a year. Russia's RTS Index dropped 3.8 percent today, capping its worst week since May 2006, and credit-default swaps on the government's debt rose 14 basis points to 166, the highest since November 2004.

Investors in Russia pulled out a net $4.6 billion since the invasion of Georgia last month, according to the central bank, contributing to the worst quarterly slump in stocks since the government's debt default a decade ago. Russia, the world's biggest energy exporter and the largest producer of nickel and palladium, was also hurt as crude oil slumped this week to the lowest level since April.

``They have to intervene because people are selling ruble assets and taking the money out of the country,'' said Nigel Rendell, senior emerging-markets strategist at Royal Bank of Canada Ltd. in London. ``In a time of uncertainty, I think it's a sensible move to get out of Russia. The political situation doesn't look good.''

The central bank is probably buying more rubles than at any time in recent years, possibly the most since 1998, Rendell said.

American Ally

Russia's first foreign military operation since the Cold War began when Georgia, one of the region's staunchest U.S. allies, tried to retake control of the pro-Moscow separatist region of South Ossetia a month ago. Russia responded by invading Georgia, occupying a third of the country for days, and setting up a buffer zone around South Ossetia and Abkhazia, another breakaway region. It recognized both as independent on Aug. 26.

Georgia is the third-largest member of the allied coalition in Iraq and part of a U.S.-backed ``southern energy corridor'' that connects the Caspian Sea region with world markets, bypassing Russia.

The RTS stock index, which soared an average 51 percent a year since 2001 under Vladimir Putin's presidency, fell 36 percent since July 1, the worst slump since the government defaulted on $40 billion of debt in August 1998, devaluing the ruble and crushing the banking system.

Stocks Slide

The dollar-denominated RTS index dropped to 1,469.15, bringing its weekly slide to 11 percent. The ruble- denominated Micex Index sank 3.7 percent to 1,234.71, the lowest level since June 2006.

The Georgia conflict added to investor concern as BP Plc and its billionaire Russian partners wrestled for control of TNK-BP, Russia's third-biggest oil producer. Two years ago, Royal Dutch Shell Plc, Europe's second-biggest oil company, ceded control of its biggest operation in Russia -- the $22 billion Sakhalin-2 oil and gas project -- to OAO Gazprom, Russia's largest company.

The ruble, which is kept within a trading band against a currency basket to limit the impact of fluctuations on the competitiveness of Russian exports, fell to as low as 25.5196 per dollar today, the weakest level since Sept. 11, 2007.

The central bank in Moscow responded by selling a ``significant'' amount of foreign currency to prop up the ruble, First Deputy Chairman Alexei Ulyukayev said. ``The ruble had got to the higher end of the trading band, so it was reasonable,'' he told reporters in Sochi today, declining to give the exact amount.

Goldman's Call

The bank sold about $4.5 billion of foreign reserves yesterday, according to Mikhail Galkin, a fixed-income analyst at MDM Bank in Moscow.

The currency snapped three days of declines against the central bank's dollar-euro basket today, advancing to 30.3789 as of 6:50 p.m. in Moscow. The ruble was 0.1 percent lower on the day versus the dollar, at 25.4788.

``Normally, central banks make an announcement after an intervention because they want transparency and they don't want to encourage volatility, but that's not the case for Russia,'' said Derek Halpenny, European head of global currency research at Bank of Tokyo-Mitsubishi. ``What the central bank is trying to do this time is to discourage speculation. The military conflict with Georgia is a shock event that wasn't on the radar screen.''

Goldman Sachs Group Inc. said today that investors should close their long ruble positions, or bets that the Russian currency will rise, based on 12-month non- deliverable forwards. The contracts oblige traders to exchange one currency for another at a set price and date in the future. Settlements are made in dollars.

Ukraine Suspended

Neighboring Ukraine's PFTS Index was the world's second worst-performing stock index this quarter after Russia, falling 29.1 percent, as the invasion of Georgia and the feud between President Viktor Yushchenko and Prime Minister Yulia Timoshenko shook investor confidence. Stock market trading was suspended today because of a 7 percent slump, according to Andriy Kolomiets, the spokesman for the PFTS Stock Exchange.

Credit-default swaps on Ukraine's government debt rose 26 basis points to 501, according to CMA Datavision prices, after earlier climbing to a record.

Debt Speculation

Credit-default swaps are financial instruments based on bonds and loans that are used to speculate on a country or company's ability to repay debt. They pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements. An increase indicates a deterioration in the perception of credit quality.

Five-year credit-default swaps on Gazprom rose 13.5 basis points to 298, the highest level since March, Bloomberg data show.

``There is a global risk aversion and an understanding that there will be new debt issued that will pay more than existing curves,'' said MDM's Galkin.

Shares in Gazprom tumbled 3.7 percent to 220.72 rubles by the close in Moscow today, after falling as much as 8.3 percent. OAO GMK Norilsk Nickel, Russia's biggest mining company, slipped as much as 15.2 percent, before closing 9.6 percent down at 3,834.09 rubles.

Oil has fallen 8 percent this week, the most in almost two months, with crude for October delivery at $105.71 on the New York Mercantile Exchange. Nickel dropped $580 to $18,625 a metric ton.

To contact the reporter on this story: Denis Maternovsky in Moscow at dmaternovsky@bloomberg.net

Last Updated: September 5, 2008 12:29 EDT