Russia closed its stock exchanges for a second day today as President Dmitry Medvedev pledged a 500 billion ruble ($20 billion) injection...
MOSCOW — Russia closed its stock exchanges for a second day today as President Dmitry Medvedev pledged a 500 billion ruble ($20 billion) injection into financial markets to stem a dizzying plummet in share prices — and quash fears of a repeat of the country’s 1998 financial collapse.
Russian President Dmitry Medvedev reiterated that the government — which sits on the world’s third-largest foreign reserves — is in a strong position to handle the crisis, which threatens to undermine an eight-year economic success story and a resurgence in national pride.
“There is no more important task for Russian authorities than supporting the stability of our financial system under the current circumstances. This is our top priority,” Russian President Dmitry Medvedev told a government meeting today. “The market should be given all the necessary support.”
The government will sink some 500 billion rubles ($19.6 billion) into the financial markets, both from the federal budget and other sources, he said.
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The moves to shore up financial markets comes as the Kremlin battles to boost liquidity and plunging confidence in the banking sector.
“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.
The MICEX exchange, where the bulk of trading in Russian stocks takes place, had hit its lowest level in nearly three years in the wake of sliding oil prices and turmoil on Wall Street. The RTS is now down nearly 60 percent from its May high, and more than 20 percent since the start of the week.
Before financial regulators shut the markets down on Wednesday, the MICEX had shed 3 percent to 853.9 points, while the benchmark RTS fell 6.5 percent to rest at 1,058.84 points. Banking stocks have been hard hit.
American Depositary Receipts, or ADRs, in Russian stocks rose, meanwhile, in London. As of 1300 GMT, Lukoil was up 8.3 percent, VTB bank by 16.6 percent and Gazprom by 8.8 percent. ADRs are a way to trade in shares outside their home country.
But at home, the government is engaged in a desperate effort to prevent the panic from spreading to the population, and rushed to introduce a raft of measures today to ease the burden on the country’s banking sector. Among those, it pledged today to lend a further 60 billion rubles ($2.36 billion) to the country’s three largest banks — Sberbank, VTB Group and Gazprombank — in an attempt to filter money down to smaller lenders, who have less ability to access funding.
But analysts said the liquidity crisis had stoked fears of a wider malaise in the banking sector.
“There’s clearly not a liquidity problem in the big banks,” said Clemens Grafe, chief economist at UBS. “We have a situation where neither the bigger banks nor the Central Bank seem to trust the smaller banks. We don’t really know if this is a problem of liquidity or a problem of insolvency.”
If insolvency is the problem, he said, “I don’t think it makes sense to extend liquidity to them. What (the central bank) has to do is take them out.”
In another offer to struggling institutions, the Central Bank said it would slash the amount banks are legally required to set aside as reserves by 4 percentage points, potentially freeing up 300 billion rubles ($11.8 billion).
It also made a gesture to the oil industry — which is struggling under a heavy taxation burden — by saying it would cut export duties on crude oil to $372 per ton, effective Oct. 1, in light of falling oil prices. Finance Minister Alexei Kudrin said the move could save the oil industry about $5.5 billion, Interfax reported.
“We will slightly diverge from the rules and will set export duty based on the monitoring of oil prices during the last 17 days of September — from Sept. 1 to Sept. 17 — and not during the last two months as we normally do,” he said.
The government’s efforts 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. Russia’s situation is markedly different now — the government has huge cash reserves and virtually no debt.
“In 1998 you had lines at the ATM machines. Now nobody is in that big a hurry,” said Ron Smith, chief strategist at Alfa Bank. “They know that for one thing the government’s flush, they know that the liquidity is going to be made available. There is a deposit insurance system which didn’t exist four years ago or it was too small at the time. Now it exists in reasonable levels so your average person is not in that greater danger of losing all their savings.”