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Putin's Very Grouchy Bear Market

Russia has come a long way since the 1990s, when a teetering Boris Yeltsin and deep financial crisis wiped out years of democratic and market reforms. What ensued was a nationalistically muscular oligarchy under the rule of Vladimir Putin—a reign enabled largely by a 13-fold surge in oil prices over less than a decade. As Russia took its place alongside emerging market stalwarts China, Brazil, and India, Putin held up neighbors and multinationals, roughed up Pussy Riot, harpooned at least one whale, and thumbed his nose at the West by propping up Syria’s Bashar Al-Assad.

Now Putin’s standoff with Ukraine is taking its toll on what’s left of Russia’s credibility in the global capital markets. The Russian ruble, for one, just hit an all-time low, and Moscow has had to scotch several bond auctions due to worsening terms.

Russia’s publicly traded companies have had it especially bad. In U.S. dollar terms, Russia’s benchmark Micex stock index is down 18 percent so far this year. Investors aren’t sticking around for more carnage: U.S.-based exchange-traded funds that invest in Russian stocks have lost 20 percent of their total assets this year, the biggest drop among nearly four dozen country-specific ETFs. Today Russian equities trade for less than five times estimated earnings, half the average multiple commanded by BRIC peers Brazil, India, and China.

“In general, Russian assets are now trading with a ‘corruption discount’ as rule of law in the country has become even more tenuous since the move into Crimea,” says Boris Schlossberg, managing director of foreign exchange strategy at BK Asset Management in New York “Russia can ill afford a long protracted conflict in that region, which is why Putin himself is actually trying to engineer a political solution in Ukraine.”

It’s not getting any better. The Ukraine imbroglio—have you ever seen John Kerry this ticked?—is jeopardizing at least $8 billion in international loans to Russian companies. At least 10 borrowers, including mega-telco VimpelCom (VIP), which is hot for a $2 billion credit line, are currently negotiating loans with U.S., European, and Japanese banks, according to Bloomberg data. The cost of insuring the country’s debt against losses surged to its highest since June.

All these may be short-term costs, and relatively mild ones at that, says Schlossberg. The real hit to Russia will come if heretofore-chill satellite nations rush to join the euro zone, precisely so they will not be victims of future acts of aggression.

Farzad is a Bloomberg Businessweek contributor. Follow him on Twitter @robenfarzad.

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