Conflict deters Russia investors

Confidence in Russia among foreign investors has been shaken.

Russian stocks hit a two-year low and the rouble weakened as fighting between Russia and Georgia unsettled investors.

Russia's main share index fell 6.5% to hit its lowest level since November 2006. The index later recovered to close 1.2% higher.

The central bank intervened to support the rouble, which fell 1.6%.

Investor confidence in the country has already been undermined by a heated dispute between oil giant BP and its Russian partners.

'Disaster'

Russian stocks had been a top performer among emerging markets but have fallen by around 30% since the beginning of the year, and foreign investors have been pulling their money out of the country.

"The Russian government obviously found regional dominance more important than keeping global investors already shaken attitude towards Russia up," said Ulrich Leuchtmann from Commerzbank.

"For the rouble, this is a disaster."

However, economists pointed out that Russia's economy, where growth has been more than 8%, was fundamentally strong.

"It has no significant impact on Russia's economic fundamentals and corporate earnings and at the end of the day we firmly believe this is what ultimately drives the markets, rather than emotions and swings in investor sentiments," said fund manager Elena Shaftan from Jupiter.

Diplomats are pressing for a ceasefire in the conflict over South Ossetia but Russia and Georgia have accused each other of launching new attacks.

Georgia said dozens of Russian bombers were attacking targets inside its territory, including around Tbilisi.