LONDON, Nov 24 — Russian stocks fell the most worldwide and government bonds slid as Turkey said it shot down a Russian fighter jet close to the Syrian border, threatening trade relations amid an escalation of regional tensions.

The dollar-denominated RTS Index fell 2.6 per cent to 873.94 by 1.35pm in Moscow as Turkey said it repeatedly warned the pilots that they were violating the nation’s airspace. The declines were led by Gazprom PJSC, which relies on Turkey for 17 per cent of its natural-gas exports outside of the Commonwealth of Independent States, according to BCS Financial Group. Government bonds declined and credit risk rose.

“A break in the relationship between the countries will have a direct economic impact,” said Joseph Dayan, the head of markets at BCS in London. “The two sides do not have an interest to completely break down relationships. The probability of military confrontation or a freeze in trade relations is highly unlikely.”

The developments are unravelling a rally in Russian assets last week that was spurred by a rapprochement between President Vladimir Putin and the West as their interests aligned to fight Islamic State terrorists in Syria in the wake of the Paris attacks. Any deterioration in relations between Turkey and its second-biggest trading partner, Russia, threatens to undermine economic ties and growth prospects for companies.

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Combining forces

While Turkey shares the US position to oust Syrian President Bashar al-Assad, he’s an ally of Putin’s. American and Russian politicians disagreed over the weekend on what the endgame for Assad should be in Syria’s future.

“There has been general hope that all parties would combine their forces against” Islamic State, Hertta Alava, who helps oversee about US$395 million (RM1.6 billion) as the head of emerging markets at FIM Asset Management Ltd in Helsinki, said by e-mail. “This event is not supporting that view.”

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Russia’s Defence Ministry denied that the aircraft had ever left Syrian airspace, while acknowledging that one of its jets had crashed in the country. The pilots presumably ejected and a search is going on for them, the ministry said on its website.

Ripple effect

On the benchmark Micex Index in Moscow, all but seven of the 50 companies retreated today as Sberbank PJSC, the nation’s biggest bank, dropped 1.6 per cent. The selloff spread to the bond market as five-year yields climbed 18 basis points, the most since August, to 10.06 per cent, the biggest increase among eastern European countries tracked by Bloomberg.

Turkish markets also retreated. The Borsa Istanbul 100 Index declined 1.3 per cent, its biggest slump on a closing basis since September 28. Two-year government notes slumped, pushing yields up 15 basis points to 10.49 per cent.

While the lira fell as much as 1 per cent against the dollar following reports of the jet downing, it recouped some losses to trade 0.6 per cent weaker at 2.8690. The rouble declined 0.3 per cent to 66.05 per dollar. Russia has been among the most vulnerable to outflows in the past two years as sanctions over Ukraine hobbled the economy, while investors have avoided Turkey due to civil unrest.

The events create “risk aversion in the short term, but this should not escalate and markets can shrug it off,” Maarten- Jan Bakkum, a senior emerging-markets strategist at NN Investment Partners in The Hague, said by e- mail. “It is not in Turkey’s or Russia’s interest to let this escalate.” — Bloomberg