While the conflict in South Ossetia is likely to have little direct impact on the Russian economy, financial markets have been hit hard by a rise in political risk. The currency has dropped by 3% since the start of August, while equities are down by over 30% from their highs earlier this summer. Fears that Russia might soon turn its attention to Ukraine have hit financial markets there as well. Ukrainian equities are down by 4% on the month, while bond spreads have widened by 15bps.