Russian shares slid to their lowest levels in nearly two years and the rouble fell as fears mounted today that Russia would widen its conflict with Georgia.

The rouble slid 1.3 per cent to 30.04 against a central bank currency basket, having fallen 1 per cent on Friday when hostilities began.

Investors also dumped Russian stocks. The benchmark RTS index dropped 4.24 per cent at the open, its lowest level since November 2006. The alternative MICEX index dropped to its lowest level since September 2006.

Today's losses followed sharp falls on Friday as investors pulled out of Russia, spooked by the conflict and its potential to damage the economies of Russia and emerging markets in the former Soviet bloc if a ceasefire amd resolution are not quickly achieved.

Hostilities escalated further overnight, with Russian bombing raids getting closer to the Georgian capital Tbilisi and rumours spread of a Russian land invasion into Georgian territory.

“Hostilities continue and that is something that worries us a great deal,” said Lars Christensen, head of new Europe research at Danske Bank. “As long as we do not move closer to any resolution of this, as long as Russian forces continue to raid or bomb inside of Georgia, I think the pressure on Russian markets will continue.”

Russia's central bank intervened in the market today to support the rouble, selling foreign currency at 30.10 to the basket.

Alexei Zaitsev, a currency dealer at UniCredit, noted that the recent surge in the dollar had added momentum to the rouble's plunge since the conflict with Georgia began.

Meanwhile, the Russia-Georgia conflict halted the recent slide in oil prices as crude rose $1.50 to $116.70. Georgia does not produce oil but the country is a key transit point for crude and gas exports from Azerbaijan to western markets, including across the BTC pipeline, which is co-owned by BP.

The head of Azerbaijan’s state oil company said exports through two Georgian ports had been halted owing to the fighting.

Russian five-year sovereign credit default swaps widened slightly to 119 basis points, compared with the previous close of 117.

Traders also said they expected Russian Eurobonds to decline with stocks and the rouble.

“Eurobonds are no different from other Russian assets, so it is time to sell them,” said Alexander Nikolayev of Bank of Moscow.

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