Russia moves to bolster banking sector

Tue Sep 16, 2008 8:00 PM EDT

Catrina Stewart, Associated Press Writer

Russia moved to bolster the country's increasingly stressed banking sector Wednesday, as the global economic turmoil deepened fears that the country could face a crisis similar to the one 10 years ago.

Russia's primary stock indexes, MICEX and RTS, plummeted, with banking stocks leading the way, prompting regulators to halt trading as of noon (0800 GMT.)

The Finance Ministry said it was increasing liquidity for the country's three largest banks, raising lending to 1.12 trillion rubles ($44.9 billion). The country's top banks — Sberbank, VTB, and Gazprombank — will be loaned federal funds for a minimum of three months, the ministry said.

"These are market-making banks capable of insuring the liquidity of the banking system," the Finance Ministry said in a statement.

"Essentially we're counting on them as core banks to be able to lend to small and medium banks," Finance Minister Alexei Kudrin said in televised comments.

The move came a day after Russian stocks plummeted to their lowest level in nearly three years as tumbling oil prices and Wall Street turmoil focused concern about Russia's commodity-driven economy.

The Central Bank on Wednesday said that for the third day in a row, its daily "repo" liquidity had been fully used by banks. The daily auctions are used to loan money to domestic banks.

On Tuesday, the Central Bank had provided a record 361 billion rubles ($14.1 billion) at that day's auction.

Russian stock indexes edged up in early trading on late Wednesday morning, but then resumed their decline. Both the benchmark RTS and the ruble-denominated MICEX fell by more than 10 percent with shares in Sberbank and VTB falling 19 and 23 percent respectively.

Fearing that Russia's economy could face a repeat of the 1998 economic crisis — which saw the ruble devalued, default on the country's sovereign debt, and widespread bank foreclosures — the government has promised to pump more money into the banking system.

Russian banks face a crunch period in October, when quarterly value added tax payments are due.

Chris Weafer, chief strategist at UralSib bank, said investors are panicking, even though Russia's underlying economic fundamentals are sound.

"The market is trading as if it is close to a default," Weafer wrote in a note to investors Wednesday. "In reality it has the world's third largest financial reserves and is still earning about $850 million everyday from crude, oil products and gas exports."