State Bank Set to Put Money in Markets

ReutersA trader working Friday in Alfa Bank's investment banking division in Moscow.
Prime Minister Vladimir Putin announced Friday that the state-owned Development Bank would this week start pumping 175 billion rubles ($6.7 billion) into Russian stock markets, which have plummeted more than 60 percent since their highs in May.

The move came after the Federal Service for Financial Markets halted trading in a pre-emptive move Friday morning after Asian markets took a battering overnight. The markets' closure rounded off another frustrating week of stop-start trading that left both indexes down by more than 20 percent amid growing fears that the global financial system is teetering on the brink of a systemic collapse and predictions of a deep economic recession.

"The Development Bank will start placing funds in Russian shares, not foreign shares, next week," Putin told reporters during a meeting at his Novo-Ogaryovo residence near Moscow. "The amount to be placed is up to 175 billion rubles this year, and no less than 175 billion rubles next year."

Putin, who is chairman of the Development Bank, also known as Vneshekonombank, or VEB, did not elaborate on the details of the plan, but said he was responding to requests to protect the Russian stock market from the effects of the global financial crisis.

"Taking into account what's happening on Western markets, I think these demands are justified," Putin said, Interfax reported.

Speaking on the sidelines of talks in Washington with Group of Seven finance ministers and a larger group of 20 advanced and developing economies, Finance Minister Alexei Kudrin said the government would not divulge its criteria when investing in Russian stocks and bonds.

"Shares are significantly undervalued. The market stopped responding to any logic and is led by psychosis," Kudrin said, Bloomberg reported. "The government's aim is not to prop up prices -- the government's only goal is to make a profitable investment."

Kudrin also said the government would soon move to enable Russian pension funds to invest in the country's stock market, a measure that analysts have said is vital to increase the long-term domestic capital base and reduce volatility.

The State Duma on Friday passed on second and third readings a series of government measures aimed at stabilizing the financial system, including its package of loans and a state guarantees to cover the first 700,000 rubles ($26,800) of personal bank deposits.

The pledge to inject state funds into the market came after another torrid week for investors. Despite trading for the equivalent of about three days, the RTS Index slumped 21 percent to end the week at 844.75 points, while the MICEX Index fell 24 percent on the week to 700.37 points.

With Russian markets closed Friday, Russian companies' shares in London fell hard as world oil prices dropped $6 per barrel, with the FTSE Russia index of 15 Russian companies' Global Depositary Receipts sinking 12 percent to 460.18 points at the close, Bloomberg reported. Among the most-liquid blue chips, Gazprom shed 13 percent, while LUKoil dropped 11 percent.

The flow of domestic bad news continued Friday as the Central Bank revoked Eurasia Center's license on credit concerns and rule violations, while a midsized lender, RosEvroBank, asked clients to repay mortgages early and ratings agency Standard & Poor's put 13 institutions on negative outlook, including Alfa Bank, Troika Dialog and UralSib. (Stories, Page 9.)

While the G& finance ministers met in Washington to work out a common approach on preventing a failure of the global banking system, another tough week for Russian markets looked likely as fears arose that domestic interbank and other lending is freezing up.

U.S. markets are closed Monday for the Columbus Day holiday.

Investors and analysts welcomed the promise of state aid for the equity market, which comes on top of about $220 billion in offered loans via state banks, according to a Citibank note to investors Friday.

The injection was probably spurred by the sharp drop in oil prices and would likely go toward large state-controlled blue-chip stocks, such as Sberbank, VTB and Gazprom, which have all taken enormous losses this year, said Chris Weafer, chief strategist at UralSib.

In the year to date, Gazprom has fallen 64 percent, Sberbank is down 70 percent and VTB has lost 79 percent.

"[The $6.7 billion in promised aid] is approximately 5 percent of the current free float of the total market," Weafer said in e-mailed comments. "The government at least thinks that valuations are very oversold and that the market is close enough to the bottom to justify this action. In that regard it is a smart investment decision."

With market trading suspended several times during the week, the focus switched to the international political stage as the government sought to take a larger role in global reaction to the crisis. After the Kremlin announced the possibility of a $5.4 billion bailout loan for Iceland, President Dmitry Medvedev attended the World Policy Forum in France to outline proposals for economic recovery.

The chances for a turn in the Russian markets largely depend on global markets' reaction to the Washington talks over the weekend, analysts said.

"I think Russia will not be able to resist whatever's happening [in the markets next week]," said Martin Gilman, a professor at the Higher School of Economics and a former IMF representative in Russia. "If international markets start to find a bottom then the Russians are actually better placed than most for a rebound in terms of lending and credit [in banking]."

Still, Putin's latest statement hints that the light at the end of the tunnel may be drawing closer for Russia.

"Time-wise, we are very close to the bottom," said James Beadle, director at Pilgrim Asset Management. "Percentage-wise, it's not so easy to say because the volatility is so high."

Of the estimated $220 billion the government has put toward liquidity and credit growth, Citibank said in its note Friday that only about $33 billion had actually been distributed through the state-controlled banks.

"Until the necessary legislative changes are made, which we think could take one to two weeks, liquidity-strapped banks still do not have access to emergency funding," Citibank analyst Yelena Rybakova wrote in the note. "We also believe that further measures are needed for the [Central Bank] to be able to provide direct liquidity support."

Beadle said the frequent suspension of the MICEX and RTS over the last few weeks did not seem beneficial for the two indexes.

"The opening and closing of the market has only made a bad situation much worse," Beadle said, calling regulators' decision to open and close the markets erratically a "well-intended but [poorly] executed plan."

Gilman said that while he did not expect the financial crisis to expand into real sectors to the extent it has in the United States, Russians would feel the effects of a slowdown in growth of the country's gross domestic product.