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. Last Updated: 07/27/2016

Market Plunges on Downgrade, IMF

Shares plunged almost 5 percent Tuesday after a statement on Russia from G-7 financial officials meeting in Paris failed to materialize and Standard & Poor's cut the sovereign debt rating.

The International Monetary Fund also added to the gloom saying it saw no need to speed extra aid to Russia, dampening speculation about an international bailout to revive the ailing economy, and fueling fears about Russia's prospects for raising $1.1 billion at a debt auction Wednesday.

The Moscow Times Index dropped 4.95 percent to end the day at 153.67 points on $35.87 million market turnover.

LUKoil and Mosenergo both sank more than 7 percent, and Unified Energy Systems closed down 2.7 percent.

Standard and Poor's cut Russia's long-term foreign currency debt rating to B plus from BB minus, citing a significant weakening of Russia's fiscal and external payments flexibility. The move follows cuts by two other rating agencies in the past two weeks.

S&P said short-term debt would still be rated B, and the outlook for Russia's credit ratings was stable.

Deputy finance ministers from the Group of Seven leading industrial nations and Russia are meeting in Paris but the timing of the meeting has been kept secret and a public statement of its results is unlikely.

The IMF and a senior U.S. Treasury official sought on Monday to play down expectations for a bailout. Deputy U.S. Treasury Secretary Lawrence Summers said that the Paris meeting would not focus solely on Russia's problems.

IMF First Deputy Managing Director Stanley Fischer said the fund was in "exploratory" talks to help Russia if conditions deteriorated further. But he said market conditions had improved, and insisted that Russia's ailing economy did not need additional help at this time. "At the moment, the market has stabilized and we don't see the need," he said.

MFK Renaissance trader Mikhail Koltsov said nonaggressive sales pushed the market down. "The news we're getting about everything -- cutting the rating, the complicated negotiations about a credit for Russia -- is not impressing people."

Dealers said profit-taking was starting to bite into last week's Russian gains. "My opinion is that this is just a correction after several days of growth last week," said Fleming UCB senior trader Samit Yakovlev, adding that the rating cut had served as an extra excuse to sell.

Yield on the one-year treasury bill due May 19, 1999, fell 95 basis points to 50.97 percent. The yield on the three-month bill due Sept. 9 fell 134 basis points to 39.09 percent.

Investors were waiting for new signs that it was safe to commit funds.

The government must raise $5 billion this month and $33 billion this year to pay maturing debt, and Central Bank cash reserves are about $10 billion.

The Finance Ministry goes into a Wednesday auction with a $1.25 billion war chest and the proclaimed intention to reject unwanted bids, but traders said the auction could still show a lack of support, which would turn the market for the worse.

While Russian officials insist they don't need a loan, investors who bought Russian debt last week on expectations of a $5 billion to $10 billion standby loan to avoid a ruble devaluation may flee again, if the bailout fails to materialize, dealers warned. But a package to back reserves would throw the waiting market into a new buying frenzy, bringing down yields by 10 points or more from about 50 percent now, a trader at a major Western bank in Moscow said. "Easily 10. Ten is nothing," he said.

Yields have ticked up and liquidity has dried up since Thursday, when enthusiasm over a successful T-bill auction and $1.25 billion Eurobond brought a wave of domestic funds into the market, cutting yields by 19 points to 46.28 percent. A Western analyst in Moscow saw yields Wednesday near market levels but said success was not certain: "If they are obviously giving the market a significant yield premium or if they are seen dipping heavily into reserves to redeem maturing bills, that would be a negative signal for the market. ... It would turn the market around."