Downgrade, U.S. Bailout Weigh on Markets

APTraders talking with each other Friday at the MICEX exchange. The MICEX Index finished the day down 1.5 percent.
Russia's main stock indexes both fell 1.5 percent Friday after Moody's Investors Service downgraded the country's banking system on liquidity concerns.

The ruble-denominated MICEX closed down 1.8 percent on the week, at 1,079 points, and the dollar-denominated RTS down 0.8 percent on the week, at 1,285 points.

Unlike the rollercoaster ride of the week before, most Russian stocks enjoyed a quieter time, but worries over the domestic liquidity squeeze and uncertainty over the U.S. government's proposed $700 billion banking bailout weighed heavily, preventing any rally from taking hold.

The RTS has lost 48 percent of its value since its May 19 high, hit by falling global commodity prices and perceptions of higher political risk.

State-controlled Sberbank, the country's largest bank, fell 4.7 percent Friday on the MICEX, its biggest decline of the week, bringing its weekly fall to 2.9 percent.

In the previous week, to Sept. 19, the bank saw its stock fall a combined 5.6 percent, despite rebounding by 56 percent on Sept. 19.

No. 2 bank VTB fared better, ending the week up 21 percent Friday on the MICEX.

Of the country's blue chips, the biggest winner was Polyus Gold, which closed the week up 43 percent on rising gold prices and reports that shareholders Vladimir Potanin and Mikhail Prokhorov were close to a deal on splitting their assets in the company.

The country's biggest energy companies, Gazprom, Rosneft and LUKoil, had no such luck, ending the week down 5.2 percent, 0.6 percent and 12.4 percent on the MICEX, respectively.

In downgrading the country's banking system to "negative," Moody's cited a large loss of capital, a lack of sufficient liquid assets, limited access to foreign lenders, loan problems and higher inflation as key factors.

Caius Rapanu, head of research at KIT Finance, criticized Moody's over the report's timing and its conclusions.

"Moody's has once again proven that they are specialists in closing the stable door after the horse has bolted," Rapanu said. "If they came up with this a few months ago, I would have seen it as a proactive measure, but now it is a little too late. This is like crying fire after the ruins are smoldering."

Rapanu was particularly critical of Moody's "wholesale" downgrading of the Russian banking sector.

"When we talk about the banking sector, it is like talking about French cuisine, you can't put all banks in the same category," Rapanu said.

Rapanu said that while smaller, regional banks may suffer, there were good prospects for the larger state-controlled banks that have greater access to funds and valuable national resources.

The biggest problems for Russian banks were more likely to arise on the lending side of the equation, Rapanu said.

Standard & Poor's rating agency has given the "absolute" majority of its Russian bank ratings "stable" outlooks, said Yekaterina Trofimova, a Paris-based banking analyst for the agency.

But Trofimova also noted that the bigger banks were also the ones with the highest foreign debt refinancing needs. "Near-term refinancing will be very challenging, even for blue chips," she said.

S&P puts foreign debt at about one-quarter of Russian banks' liabilities, Trofimova said.

Tom Mundy, equity strategist at Renaissance Capital, said investors were waiting to see what bailout package the U.S. Congress would pass.

"The markets have been very volatile, people are trading on any news that comes out of the Republican or Democratic side," he noted, referring to the drawn-out talks in Congress as some U.S. lawmakers have sought to include taxpayer guarantees and protection for homeowners against foreclosures in the huge bailout.

Vladimir Kreyndel, an analyst at the Institute of Financial Research, agreed that the ability of Russian banks to weather the storm depended heavily on the fate of the U.S. bailout plan. "If the plan is not realized or doesn't work, or for some reason is delayed further, the Russian banking system will not be able to pay its debts in the West," Kreyndel said.