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. Last Updated: 07/27/2016

State Buys Svyaz in First Big Bailout

State-owned Development Bank, whose board is chaired by Prime Minister Vladimir Putin, said Tuesday that it had agreed to buy struggling Svyaz Bank, which had seen much of its value erased in the recent stock market plunge.

The deal represented the first government move to bail out a major private bank since the global financial crisis prompted a sharp drop in Russian stocks and a liquidity crunch last week.

Development Bank, also known as Vneshekonombank, said in a statement that it received the go-ahead from the Central Bank to purchase a 98 percent stake in Svyaz Bank and that it had moved to supply the institution with "considerable financial resources" to make current payments and meet obligations.

Svyaz Bank stressed the importance of its operations to the confidence in the banking sector in a statement issued Tuesday.

"Svyaz Bank bears a large social responsibility for transferring money for the payment of pensions and social benefits … across the entire country," the statement said.

The transfers are distributed via its 49 regional branches and a vast network of post offices, said the bank, which has a history of close cooperation with state-owned Russian Post.

Despite the difficulties with interbank lending and the stock market jitters, the there had been no interruption of its "social" payments, the bank said.

As of August, Svyaz Bank held 60 percent of its assets in Russian equities. It used the securities as collateral for repo transactions, and when the value of the shares fell last week, it was unable to answer margin calls from its creditors, Moody's Investors Service said Monday as part of an announcement that it was downgrading the bank.

A margin call is a demand from a creditor upon a client to deposit more money or securities as collateral when the value of the existing collateral falls, or to return the loan immediately.

"Svyaz Bank expresses gratitude to its clients and partners for trust and understanding in the situation," it said in the statement.

Development Bank is a government agent for investment in the national economy, management of retirement savings and foreign debt to Russia.

Interfax ranked Svyaz Bank 20th in the country by asset value in July. Its chief, Alla Alyoshkina, came to the bank last year from a senior position at Sberbank, after former Economic Development and Trade Minister German Gref was named to head the state-controlled commercial bank.

Andrei Kazmin, the chief of Russian Post, was Gref's predecessor at Sberbank.

Moody's said Svyaz Bank fell prey to its appetite for high risk.

"Perhaps they underestimated the volatility of the Russian stock market and looked at its prospects more optimistically than the others," said Yelena Redko, an analyst at Moody's Investors Service in Moscow.

It was not alone in such miscalculations, she said, with many Russian banks working to increase their assets in the last few years while disregarding their quality and potential risks that a global crisis could pose.

Investment bank KIT Finance, which appears to have been the first victim of the liquidity squeeze, was still in the final stages of negotiations Tuesday to sell a stake to a strategic partner, Gazprom-linked Lider Asset Management. The negotiations on the sale were first announced Thursday.

Development Bank's move to bail out Svyaz Bank was meant to send a signal to the market that the state is determined to prevent a liquidity shortage from damaging major banks, said Dmitry Khamrakulov, an analyst at the Bank of Moscow.

"They did it to stop the spread of the infection," Khamrakulov said.

But the state might leave smaller banks to fold, simply repaying the state-guaranteed portion of deposits made by individuals, he said.

The government injected tens of billions of dollars of liquidity into the sector last week and has promised more funding if necessary to prevent lending from grinding to a halt.