State Will Start Buying Shares This Week

Finance Minister Alexei Kudrin announced Friday that the state would invest $6.7 billion from the National Welfare Fund into "secure, high-yield" Russian securities, just after sending stocks tumbling with a prediction that the market's troubles would continue.

The $48.7 billion welfare fund is currently invested in foreign bonds, including ones issued by government-affiliated agencies in the United States and Britain. Kudrin said the investment in securities could start as soon as Monday.

The money will add to the more than $200 billion that the government has set aside for the financial sector, $86 billion of which has been allocated to boost banks' liquidity. Still, economists and analysts say the measure will have little effect on the market unless it is immediately detailed and put into action.

"The market has been promised a number of times that government intervention is coming since talks about it began in September," said Yevgeny Nadorshin, chief economist at Trust Investment Bank. "Now these words only disappoint market participants. [Investors] simply do not believe it anymore."

The Central Bank garnered a more optimistic response to an announcement Friday that it would downgrade the rating levels banks need to receive state funding. Russian banks can now receive loans with securities as low as B- on Fitch Ratings and Standard & Poor's, and B3 on Moody's.

The plans came the same day that the State Duma passed in a first reading a bill that would allow the Central Bank to operate directly in securities markets.

Nadorshin said that if the Central Bank actually implemented the change to its loan policy next week -- making up to 100 Russian banks eligible for a cash infusion -- then the market would likely see a "very positive reaction."

S&P credit analyst Frank Gill agreed.

"This seems like an evolution of the direction their policy has been going in. I think what they're trying to do is get liquidity to second- and third-tier banks," especially after Globex failed Thursday night, Gill said. (Story, Page 9).

Speaking to a group of lawmakers, Kudrin said the stock indexes' wild swings were a result of Russia's "weak financial system" and that the country's stocks would continue to decline because of increasing "risks on the global market," Interfax reported.

Both the MICEX and RTS dropped sharply after Kudrin's less than reassuring words, with the MICEX falling more than 5 percent from Thursday's close after a 6 percent lead in the morning. The ruble-denominated index recovered slightly to finish the day down 4.3 percent at 599.6 points.

The dollar-denominated RTS dropped 6.5 percent to close at 667.6 points -- down nearly 21 percent on the week.

The biggest mover on the MICEX was potash producer Uralkali, whose stock sank 16 percent after its said a "ground crack" from a flooded mine would threaten shipments from rival Silvinit, the country's largest producer of the fertilizer component.

Energy stocks had a mixed day, with Urals for November delivery rising by 8 percent Friday evening after breaking below the $70 mark the day before.

LUKoil's shares closed down 3.6 percent, and Gazprom fell 1.8 percent on MICEX, while Rosneft and Surgutneftegaz beat the index, rising 3.8 percent and 0.3 percent, respectively.

Rory MacFarquhar, senior economist at Goldman Sachs, said oil prices would continue to determine the direction of the market.

"Until we have some clarity about where the oil price is going to land, it's hard to declare that [the Russian market] has reached the bottom," MacFarquhar said.

"The nature of volatility is that it's completely unpredictable. It may be that when state money starts to show up in the market that we'll start to see something and that we'll stop hearing these scary stories across the country of companies shutting down production," MacFarquhar added.

And although it is not entirely clear why Kudrin chose to throw cold water on the markets' early rally, some observers saw the move as a defense of the welfare fund before its resources were invested in the volatile, sinking market.

"You simply hear the words of a bear," Nadorshin said.