State Set To Buy If Stocks Weaken

Russia's badly shaken stock exchanges were set to reopen Friday after a day and a half of suspended trading, as President Dmitry Medvedev pledged that up to 500 billion rubles ($19.7 billion) of state funds would be available to prop up distressed stocks, including those of large state-controlled firms.

The government would intervene to guarantee "the stability of the stock market," Medvedev told a meeting of top government finance officials and bankers Thursday.

In televised comments, Finance Minister Alexei Kudrin elaborated on Medvedev's promise, saying that the government planned to invest 250 billion rubles ($9.8 billion) at first, and would pump up to 250 billion rubles more if stocks fell further.

The promise of state cash to provide a cushion for the markets quickly buoyed investor sentiment, sending Russian stocks traded in London up and lowering interbank lending rates.

The closure of the markets came after the ruble-denominated MICEX Index plunged 25 percent in a little over two days of trading earlier in the week, while the dollar-denominated RTS Index lost 21 percent. At midday Wednesday, after brokerage KIT Finance announced it was holding talks on a forced sale, the government's markets regulator stepped in and halted trading until further notice.

On Thursday, the exchanges only allowed a limited number of settlements of repo deals and full trading was to resume "as normal" Friday after the regulator gave them the green light to reopen.

Medvedev's pledge came as the Central Bank and the Finance Ministry have pumped dozens of billions of dollars in short-term credit over the past week in an effort to plug a growing liquidity gap in the banking system.

Kudrin said in televised remarks that the government would also decide soon on additional tax breaks for the oil industry, but would put off a decision on cutting the rate of value-added tax until next year.

He also announced plans Thursday to reduce export duties on oil by 20 percent to $372 per barrel from Oct. 1 as a way of boosting oil firms' cash position.

Investors and analysts gave a cautious welcome to the government's measures and predicted that the injection of cash would staunch the market's losses — if only temporarily.

"The government's intervention has been both timely and appropriate," Troika Dialog president Pavel Teplukhin told reporters Thursday.

Teplukhin agreed that markets should remain closed while market participants settled accounts for the transactions made Monday and Tuesday. "Until these procedures are completed, there would be no funds and consequently, there would be no buyers in the market," he said.

"All the ingredients are in place for a market jump on Friday," said Dominic Hewing, head of equity sales at Metropol, noting that oil jumping back over $100 would also boost Russian stocks.

So far, KIT Finance has been the only publicly named corporate casualty of the market turmoil.

From Sept. 8 to Sept. 15, the midsize brokerage defaulted on 7 billion rubles of repurchase obligations, according to figures released by MICEX late Wednesday.

But the crisis may also have claimed its first human casualty, as Sergei Murafer, general director of brokerage Partnyor, attempted suicide Tuesday because of the financial difficulties faced by his company, Interfax reported, citing sources inside the company.

Natalya Moiseyenko, deputy director of Partnyor, said Thursday that Murafer remained "in a very critical condition," but said she could not say what were the exact reasons for his suicide attempt.

James Beadle, director of Pilgrim Asset Management, said the planned injection of state cash should stop the free fall of the markets, at least for a couple of days.

Over the longer term, much more depends on global factors than on local ones, Beadle said, adding that there was only so much the government could do to fix liquidity problems.

"Ultimately, banks and brokerages here will have to learn how to control their risks better," he said.

Dominic Hewing of Metropol said while suspension of trading had no practical effect on the economy as a whole, it could negatively impact sentiments toward Russian equities as a whole.

"The problem is not one of a lack of liquidity at the likes of Sberbank and VTB, and their ability to lend to the smaller banks, " Hewing said. "It is a complete lack of confidence between the smaller banks on lending or borrowing and a heightened concern about counterparty risk."