Russia Gives Banks Cash, Halts Stock Trading to Head Off Crisis

By Alex Nicholson and William Mauldin

Sept. 17 (Bloomberg) -- Russia halted stock trading for a second day, poured $44 billion into its three largest banks and relaxed restrictions on lenders to stem the worst financial crisis since the nation defaulted a decade ago.

The central bank slashed reserve requirements for banks, freeing up as much as $12 billion, and the Finance Ministry allowed OAO Sberbank, VTB Group and OAO Gazprombank to borrow the $44 billion for three months. The benchmark Micex index plunged as much as 10 percent, bringing its three-day decline to 25 percent.

Russia's markets are facing the biggest test since the government defaulted on domestic debt in 1998. The decade-long economic boom is fading, foreign investors have pulled at least $35 billion from the nation's stocks and bonds since the five-day war in Georgia last month, and the collapse this week of Lehman Brothers Holdings Inc. and American International Group Inc. prompted a flight from emerging markets.

``I will tell my clients today to continue to abstain from buying Russian assets'' until economic problems are solved, said Zina Psiola, who manages a $1 billion Russian equities fund at Clariden Leu AG in Zurich.

The cost of lending has soared to a record, with the MosPrime overnight rate reaching 11.1 percent today, deterring speculative bets in equities. Russian stocks have lost more than $425 billion in value since reaching an all-time high May 17.

The Moscow-based brokerage KIT Finance said it's in talks with investors to sell a stake after failing to meet some financial obligations related to repurchase agreements.

`Heightened Risk'

``Heightened counterparty risk means that the only place to raise cash is the equity market,'' said Julian Rimmer, head of sales trading at UralSib Financial Corp. in London. ``Every time the market opens we have selling to meet margin calls, which triggers stop-losses, more margin calls and redemptions.''

The cost of protecting bonds sold by Sberbank from default jumped 60 basis points to 3.55 percentage points, according to CMA Datavision prices at 3 p.m. in London. Credit-default swaps on OAO Gazprom, the gas export monopoly, fell 38 basis points to 421. Contracts on VTB Group declined 35 basis points from an all-time high to 6.53 percentage points, according to CMA.

Credit-default swaps, contracts conceived to protect bondholders against default, pay the buyer face value in exchange for the underlying securities or the cash equivalent should a company fail to adhere to its debt agreements. A rise indicates deterioration in the perception of credit quality.

A basis point on a credit-default swap contract protecting $10 million of debt from default for five years is equivalent to $1,000 a year.

`Necessary Measures'

President Dmitry Medvedev met Prime Minister Vladimir Putin today to discuss developments surrounding the economy.

``The situation is being followed very closely,'' Putin's spokesman, Dmitry Peskov, said in a phone interview. ``Necessary measures are being taken.''

Central Bank Chairman Sergey Ignatiev said the cutting of banks' reserve requirements by 4 percentage points will free up about 300 billion rubles. The rate for individual liabilities will fall to 1.5 percent, the rate for foreign bank liabilities will fall to 4.5 percent and the requirement for other liabilities will decrease to 2 percent.

``This is a bigger cut than we expected,'' Natalia Orlova, chief economist at Alfa Bank in Moscow, said by telephone. ``This is very good news.''

Ignatiev said the central bank will keep the ruble stable and he has ``no doubt'' stocks will rebound. He forecast inflation may accelerate to about 12 percent this year because of the extra cash in the system before slowing to between 7 percent and 8.5 percent next year.

Economic Woes

The ruble has lost 4.8 percent against the dollar since Aug. 8, when Russia sent troops and warplanes into Georgia for a military campaign that led to the worst relations with NATO since the Cold War. Investors have pulled at least $35 billion out of the country since the war, according to BNP Paribas SA estimates.

Oil production, the government's biggest source of revenue, and accelerating inflation are adding to concerns. Crude output is falling for the first time since 1998 and the inflation rate advanced more than expected in August to 15 percent.

Industrial output grew more slowly than economists expected in August and economic growth in the second quarter slowed to an annual 7.5 percent from 8.5 percent in the previous period.

Still, unlike 1998, Russia is ``pretty well prepared'' to weather the turmoil, the World Bank's chief representative in Russia, Klaus Rohland, said today. The economy has grown every year for a decade and its international reserves have surged in the period by almost 50 times to $574 billion.

Banking Investors

International banks have entered the Russian market in recent years. Societe Generale, France's second-largest bank, owns OAO Rosbank, a top 10 retail bank. Commerzbank AG, Germany's second- biggest lender by assets, owns a 15 percent stake in Promsvyazbank and Unicredit SpA, Europe's fourth-biggest bank, recently purchased Moscow International Bank. Raiffeisen International Bank-Holding AG is the largest foreign bank by assets in Russia.

The Finance Ministry yesterday added $20 billion to the interbank lending market.

Sberbank, VTB and Gazprombank ``are market-making banks capable of insuring the liquidity of the banking system,'' the ministry said in a statement today.

Finance Minister Alexei Kudrin said the measures should ``smooth over the shock changes'' in the markets. ``With foreign borrowing stopping, we must soften the impact with additional funds,'' he said on state television.

The ruble-denominated Micex Stock Exchange suspended trading indefinitely at 12:10 p.m. after its index plunged as much as 10 percent within an hour. The benchmark fell 17 percent yesterday, the biggest decline of the 88 indexes tracked by Bloomberg. The dollar-denominated RTS halted trading after similar declines.

``The primary objective of these measures is to inject liquidity to calm nervousness,'' Alexander Morozov, chief economist at HSBC Bank in Moscow, said by telephone.

To contact the reporter on this story: Alex Nicholson in Moscow at anicholson6@bloomberg.net

Last Updated: September 17, 2008 12:03 EDT

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