Russia's RTS stock index is turning into the world's worst performer this quarter as tumbling oil, a war in Georgia and the probe of a steel company remind investors owning shares in the former Communist nation can be perilous.

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Russia’s RTS stock index is turning into the world’s worst performer this quarter as tumbling oil, a war in Georgia and the probe of a steel company remind investors owning shares in the former Communist nation can be perilous.

The RTS index was down 23 percent since June 30, even after it appeared the invasion of Georgia had been halted earlier this past week, which sent the index up 3.5 percent.

“This bounce should be sold,” said Ian Hague, the New York-based founding partner of Firebird Management, who reduced Russian stock holdings in the past three months to less than half of the $1.8 billion he had invested in countries that made up the former Soviet Union.

“Russia will be a pariah. It is a pariah. It’s difficult to do anything other than reduce your exposure,” Hague said after returning from Tbilisi, the Georgian capital.

The retreat this quarter was the steepest among indexes in the world’s 20 biggest stock markets, according to data compiled by Bloomberg.

The slump pushed valuations of the 48 companies in the index to the lowest level since March 2006.

The government’s investigation of steel producer OAO Mechel comes five years after the state’s assault on OAO Yukos Oil, while its decision to send tanks into Georgia shook confidence in Russian President Dmitry Medvedev.

The conflict was Russia’s first major foreign offensive since the collapse of the Soviet Union in 1991, and strained relations with the United States.

The RTS index had surged 14-fold during Vladimir Putin’s presidency from 2000-08.

Putin accused Mechel on July 24 of price fixing and said four days later the company used offshore traders to minimize taxes. The actions spurred comparisons with the dismantling of Yukos, which was bankrupted in 2006 during Putin’s presidency after the government claimed more than $30 billion in back taxes.

Yukos’ founder, Mikhail Khodorkovsky, is serving eight years in a Siberian labor camp. Some of his company’s assets were transferred to state-controlled Rosneft.

The RTS Index fell 11 percent in October 2003, the month of Khodorkovsky’s arrest, as investors grew concerned that more companies would fall victim to government takeovers. It was the index’s worst monthly decline in two years at the time.

Putin presided over eight years of economic growth as president. Medvedev, his hand-picked successor, has struggled to combat inflation since taking over in May.

JPMorgan Chase cited the “risk that nonconventional methods may be used to control inflation,” when it cut Russian stocks to “underweight” last month. The New York-based bank also said that economic “momentum” was slowing in the world’s biggest energy exporter.

Russia’s annual inflation rate was 15.1 percent in both May and June, matching the highest level in five years, data from the Federal Statistics Service show.

The International Monetary Fund estimates the country’s economic growth will slow to 6.8 percent this year from 8.1 percent in 2007. The Washington-based fund expects a 6.3 percent expansion in 2009, which would be the weakest since 2002.

“Unfortunately, the global and even the Russian macroeconomic picture is going from bad to worse,” said Zina Psiola, who manages $1.1 billion in Russian stocks at Clariden Leu in Zurich.

But some see this as a good time to invest in Russian stocks.

“Negative news is at a record level, and there’s too much irrational fear in the case of Mechel and Georgia,” said investor Jochen Wermuth of Wermuth Asset Management, who manages about $1 billion in Frankfurt. “Russia is not as evil as people think.”

For Banco Santander’s Nerea Heras, Russian equities aren’t cheap enough to compensate for political risk and accelerating inflation.

Heras, who manages about $1.5 billion in emerging markets equities in Madrid, is buying shares in Turkey and India.

“There are other interesting countries to invest money in rather than Russia,” Heras said.