Investors are fleeing Russia as demonstrators against President Vladimir Putin dig in, exacerbating the impact of Europe's debt crisis on the country's markets, money managers from Frankfurt to Moscow said.

file photo Activists who clashed with police before Putin's May 7 inauguration are protesting non-stop in Moscow, using the Occupy Wall Street movement's tactics. As the benchmark RTS equity index entered a bear market, Russia-focused equity funds recorded $251 million of outflows in the seven days to May 9, the most this year, while China lost $127 million, India $148 million and Brazil $167 million, EPFR Global data show.

Tensions have risen as opposition leaders Alexei Navalny and Sergei Udaltsov face potential charges punishable with as much as three years in jail. The threat of a crackdown is intensifying a sell-off in equities, bonds and the ruble sparked by Greece's possible exit from the euro and the falling price of oil, the country's chief export, said Zina Psiola, chief executive of Granite Investment in Zurich.

"The protests are just one expression of discontent but money speaks louder than the people on the street as we are seeing with the capital and equity outflows," Psiola, whose company manages about $90 million including Russian stocks, said in a phone interview.

Bear Market

The dollar-denominated RTS index is the world's worst- performing major index today, according to data compiled by Bloomberg. The gauge slid as much as 5.1 percent and last traded 3.7 percent lower at 1,323.62 as of 4:54 p.m. in Moscow, pushing this month's decline to about 17 percent.

The larger ruble-denominated Micex index headed for a bear market, losing 3.9 percent to 1,302.68. The 30-stock index will enter a bear market if it closes under 1,304.92, a 20 percent drop from this year's March 14 high. OAO Sberbank (SBER), the country's largest lender, tumbled as much as 8.2 percent.

"If we hadn't had this problem with Greece, the impact of the potential jailing of Navalny on Russian bonds would have been very minimal," Sergey Dergachev, who helps oversee $8.5 billion in emerging-market funds at Union Investment Privatfonds in Frankfurt, said in an e-mail. "When everything gets worse, investors remember all the political stuff and a vicious selling cycle starts."

Rule of Law

While Putin has pledged to make the country's political process more democratic and strengthen the rule of law, an increasing number of Russians are also seeking to move funds out of the country to shield their wealth from his 12-year reign, said Edward Mermelstein, a New York-based attorney who represents Russian investors in the U.S.

Capital flight reached $42 billion for the first four months of 2012, more than half of last year's $80.5 billion outflow, which was the second-highest level since central bank records began in 1994.

"Putin is going to have problems containing the protests," Mermelstein said in a telephone interview. "If he doesn't make the changes he's promised, he's going to find it very difficult to justify his presidency."

Capital outflows are being caused by Russian banks' needs to meet their creditor obligations in other countries and a move out of emerging markets by global investors, central bank Governor Sergei Ignatiev told lawmakers yesterday.

Shield Themselves

"In Europe, there is a sovereign debt crisis and there is turbulence on financial markets, not only in Europe but in other markets too," Ignatiev said. "That's why foreign investors are trying to shield themselves and pulling out of emerging markets."

Putin's opponents, who mounted the biggest rallies in more than a decade to protest alleged fraud in December parliamentary elections, are demanding new legislative and presidential polls.

While authorities have fulfilled pledges to relax the rules for registering political parties and restore direct elections for regional governors, mayoral polls in cities including Astrakhan triggered disputes over alleged fraud.

Police beat demonstrators in Moscow with batons and arrested hundreds of them on May 6 and in the following days during a series of unauthorized gatherings. When riot police dismantled a week-old protest camp near the Chistye Prudy subway station, arresting 20 people, activists moved yesterday to another square near the Moscow Zoo.

'Stay on the Streets'

"We're determined to force the authorities to take us seriously," said Ilya Yashin, who's coordinating the protests. "As long as they don't meet our demands, we're prepared to stay on the streets."

Opposition organizers said Putin's decision to skip the Group of Eight summit hosted by U.S. President Barack Obama this week is evidence that their tactics are succeeding in driving a wedge between the Russian leader and the West.

"Putin is casting himself outside the civilized world, he's responsible for capital flight because he's the one who's creating the conditions for political and economic instability," Yashin said in a May 14 interview at the encampment broken up by police yesterday in a dawn raid. "Putin's image today is of a usurper who only preserves his power with the help of repression and police batons."

Police last night detained Yashin and several other protesters as they broke up the new camp at Barrikadnaya, close to the U.S. Embassy. Yashin faces 15 days in jail at a court hearing today, activist and television presenter Ksenia Sobchak said on her Twitter Inc. account. About 50 activists gathered again this morning at the Barrikadnaya protest site, she said.

G-8 Snub

Putin decided not to attend the summit of the world's leading industrialized nations to show U.S. President Barack Obama his displeasure over American criticism of Russian elections and the police action against protesters, Alexei Pushkov, a senior ruling-party lawmaker, said May 14.

The Russian leader on May 9 told Obama in a telephone call that he can't attend the G-8 meeting in Camp David because he needs to make decisions concerning the new Russian government, the White House said.

While some Putin critics including the leader of the pro- democracy party Yabloko, Grigory Yavlinsky, have accused activists of provoking police violence, the Chistye Prudy site became a focal point for opposition. Thousands of people marched last weekend through Moscow's central boulevards led by novelists and poets on a protest walk that converged on the camp. Artists plan to lead another march next weekend.

'New Format'

"If the government tries to get heavy-handed, the protesters will just disperse, emerge in a new format and things will become bigger," said Clemens Grafe, chief economist at Goldman Sachs in Moscow.

The new Cabinet of Prime Minister Dmitry Medvedev, who stepped down as president to allow Putin's Kremlin return, may not have "sufficient political clout" to pursue investor- friendly policies and keep spending under control, Goldman Sachs (GS) said in a research note this week.

While foreign companies already in Russia are familiar with the risks, those who are considering whether to invest are concerned about political stability and economic predictability, said Chris Weafer, chief strategist at Troika Dialog, the investment bank owned by state-run OAO Sberbank.

"All the headlines are being hogged by the opposition and the message going out to the West is that there is still a political threat," Weafer said. "Investors had expected the protests to end with the presidential elections and even though they are at a low level, the glowing embers keep the risk they will turn into a raging inferno at some point."

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