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Rattled Russia orders markets to stay closed

The Kremlin is in crisis mode, pledging a $20 billion boost Thursday to shore up Russia’s battered markets as it seeks to ward off a financial crash.
/ Source: The Associated Press

The Kremlin is in crisis mode, pledging a $20 billion boost Thursday to shore up Russia’s battered markets as it seeks to ward off a financial crash and restore confidence in its fragile banking sector.

For a second day, stock markets remained closed after a dizzying plunge in share prices, triggered by a wave of panic selling and margin calls. MICEX, where most trading takes place, fell 25 percent in three days this week and has lost 56 percent since its May peak.

The government, which sits on the world’s third-largest financial reserves, has clutched for breathing space by simply halting trading as it debates a raft of measures designed to bring relief to the markets and the banking system — suffering from a lack of liquidity, or ready cash to operate with.

It rushed Thursday to introduce measures to ease the burden on the banks. It pledged to lend a further 60 billion rubles ($2.36 billion) to the country’s three largest banks — Sberbank, VTB and Gazprombank — in an attempt to filter money down to smaller lenders, who have less ability to access funding.

Yet, amid the turmoil on Wall Street and world financial markets, the problem is not just lack of cash but lack of trust.

“Everybody’s sitting on a lot of cash, but nobody wants to lend it to anybody else,” said Hawk Sunshine, head of investment banking at Metropol investment bank. “Yes, the Central Bank is giving a ton of money to Sberbank, VTB and Gazprombank, but are they going to give it to anybody else? And I think that there’s some doubt on the market that they will.”

President Dmitry Medvedev said Thursday that the Kremlin’s number one priority was to stabilize the financial markets. He ordered his government to consider putting up to 500 billion rubles ($20 billion) into the country’s financial markets, a move that provided an immediate boost to Russian shares trading as American Depositary Receipts, or ADRs, in London.

Finance Minister Alexei Kudrin said the government would use the money to buy securities on the stock market if shares remain undervalued for an extended period, the RIA-Novosti news agency reported.

“If they simply buy shares in order to dispose of them at a later time ... that would make a lot of sense. Because this signaling to the market means that the market can’t go lower, because the Russian government can support it at this level,” said Sunshine.

The Central Bank said last week it spent a net $5.3 billion from its foreign currency reserves in the first 10 days of September to prop up the ruble — which has plunged as capital is whisked out of the country. Since Russia’s invasion of Georgia last month, the ruble has lost nearly 5 percent against the U.S. dollar.

For now, many ordinary Russians are left wondering what all of the fuss is about.

“You know a guy called Putin? He said that everything is okay, everything is under control, the situation is being dealt with effectively and no one should panic,” said Digomer, watching over a mall that teems with shoppers late into the night. “So everything is fine. No worries whatsoever.”

Digomer is not alone. Most Russians have come to see Vladimir Putin, now prime minister after eight years as president, as a powerful protector of Russian interests at home and abroad.

But complacency may not last if the rot spreads, particularly to the overheated real estate sector. Russia — which saw its economy grow by a robust 8.1 percent last year — could face knock-on effects from a lending freeze if it chokes off credit to businesses.

“There are going to be some consequences,” said Ron Smith, chief strategist at Alfa Bank. “We are going to see real slowdowns in the real economy, especially in real estate and some other particular sectors that are heavily reliant on debt financing and now no longer have access, for all practical purposes, to financing.”

Mirax Group, which is developing Europe’s highest tower in a Moscow office complex, put on hold all new projects this week, while analysts say Sistema-Hals, a real estate company that’s part of the AFK Sistema Group is over-leveraged and looking to offload some of its non-core assets.

The government’s efforts to boost bank liquidity — which include slashing the reserve requirements for banks by 4 percent and cuts on oil export duties — come as it seeks to fend off comparisons to the financial collapse of 1998, which saw the ruble devalued, default on the country’s sovereign debt and widespread bank failures.

Still, Russia’s situation is markedly different now — the government has huge cash reserves and virtually no debt, plus deposit insurance to discourage people from pulling their money from banks out of fear.