2-Hour Break Turns Markets Around

APMICEX traders watching Tuesday's session. After trading was halted in the morning, the exchange reopened to see its index finish up 1 percent for the day.
Trading on the country's stock exchanges was suspended for two hours on Tuesday morning in an attempt by the federal market regulator to prevent Monday's nightmare trading in the United States from sparking an equal freefall for Russian indexes.

A frantic sell-off hit U.S. stock markets after Congress voted down the $700 billion financial-sector bailout plan. The Dow Jones Industrial Average experienced its largest one-day fall in history, closing down 778 points, or 7 percent, on the day. The Nasdaq and the S&P 500 indexes dropped 9.1 percent and 8.8 percent, respectively.

The freeze in Moscow trading came into effect after a frenzied first minute of trading, during which the country's largest bank, state-controlled Sberbank, lost 7.9 percent and shares in Novatek, the country's second-largest gas producer, fell 12 percent.

According to Vladimir Milovidov, head of the Federal Service for Financial Markets, the agency had already decided to suspend trading Tuesday but allowed the markets to open briefly to "see what kind of reaction there would be to the losses on the European and U.S. markets."

"We anticipated a negative reaction, and we took these measures to best minimize its consequences," Milovidov said Tuesday.

Milovidov said the move had been at least somewhat successful.

"Given the fact that both the RTS Index and the MICEX are in positive territory, I don't think we made the situation any worse."

The ruble-denominated MICEX Index ultimately closed up 1 percent, while the dollar-denominated RTS Index finished with a 1.5 percent gain for the day. After reopening, both exchanges were allowed by the market regulator to continue trading for an extra hour, until 7 p.m.

Ronald Smith, chief strategist at Alfa Bank, was upbeat about the day's events.

"The government is trying to work out the blockages in the equity markets, leftover from a few weeks ago, and has been making good progress," Smith said. "However, the market is poorly positioned to deal with this type of volatility right now, so it is, indeed, probably better to shut things down.

"In any other environment, such a decision might reflect poorly on decision makers," he added, "but in this one it is probably either the right decision, or at the least does no more harm than the alternative."

Russian indexes were closed for two days straight on Sept. 18 and 19, after markets fell to a three-year low on Sept. 17.

London's FTSE Russia index was up 5 percent at 6:20 p.m. in London. Energy giants Gazprom, LUKoil and Novatek were up 1.7 percent, 2.6 percent and 2 percent, respectively.

Investor confidence might have been boosted by the announcement by Prime Minister Vladimir Putin late Monday of an extra $50 billion in funding from the Central Bank for the financial sector.

These funds would bring the total liquidity boost provided by the government to more than $150 billion.

Kremlin spokesman Dmitry Peskov said Tuesday that the $50 billion would come from the federal budget and not from Central Bank reserves, as Deputy Economic Development Minister Andrei Klepach had said Monday and had been reported in the Russian press.

"I can't answer for what is written in the papers," Peskov said Tuesday.

Vladimir Osakovsky, an economist at UniCredit Aton, nevertheless, maintained that the $50 billion would come from federal reserves.

"The money will be given in foreign currency, and given that the Russian Central Bank does not print foreign currency, it will come out of foreign exchange reserves," Osakovsky said.

The $50 billion will be transferred to state-controlled Development Bank, which will then provide loans to Russian companies and banks to help them settle foreign debts, Putin said Monday.

Osakovsky said he thought that this was "the proper way to deal with the crisis."

"This is replacing capital that is not available on the international market, and it was for this purpose that the reserves were built up in the past," Osakovsky said. "This money has been saved for a rainy day, and right now it is definitely pouring," he continued.

Igor Yurgens, chairman of the Kremlin-connected Institute of Contemporary Development and chairman of the board at Renaissance Capital, agreed with Osakovsky.

"It's a fire brigade gesture. If it's done transparently and with the involvement of civil society, it's a good move," Yurgens said Monday. "If there's an element of cronyism and arbitrary decision making about who gets the funds, then it will be a problem."

Staff Writer Miriam Elder contributed to this report.