Russian liquidity boost on hold

A proposed $37 billion (950 billion RUB) liquidity injection for Russia’s biggest banks stalled in parliament yesterday, adding to Moscow’s financial troubles.

If approved, the Kremlin’s latest funding initiative, proposed on Tuesday by Russian president Dmitry Medvedev, would be distributed to Russian banks in the form of long-term loans of subordinated credit with a term exceeding five years.

Russia’s two largest banks are to receive the lion’s share of the funds with up to $19.2 billion (500 billion RUB) going to Russia’s main state bank, Sberbank, and $7.7 billion (200 billion RUB) going to another state bank, Vneshtorgbank. A further $9.6 billion (225 billion RUB) will go to other banks, including $957.9 million proposed for Rosselkhozbank, which is also state-owned. None of the funds will go to private sector banks directly - instead, they will be expected to seek interbank loans from Sberbank and Vneshtorgbank, a spokesman for the finance ministry said.

The Russian finance ministry and President Medvedev have introduced numerous initiatives to provide extra liquidity since the escalation of the global financial crisis, following Lehman Brothers’ collapse on September 15. On September 18, Medvedev asked the Duma to approve a 500 billion RUB addition to the state budget to bolster struggling financial markets. On the following day, September 19, the Russian finance ministry announced the occurrence of three auctions which would provide additional liquidity to banks. These auctions took place on September 23, 24, and 25, adding 1.1 trillion RUB ($42.2 billion) to bank deposits.

The Federal Council, Russia’s upper house, on Monday released a statement saying in its next session it would quickly push through a series of measures to support Russia’s financial markets, which would be ratified provided the Duma, the lower house, supported the motion. Yesterday a plenary session of the financial market committee of the Duma was called to discuss the President’s proposal, but no agreement was reached.

As well as delays in the Duma, the Russian liquidity measures face restrictions on the Ministry of Finance’s auction facility. Currently only 28 of 1,100 financial institutions in Russia can participate and these banks must have $5 billion worth of equity, and credit ratings no less than ВВ- by Fitch and Standard & Poor's, or Ва3 by Moody's.

Yesterday, the Russian regulator, the federal financial markets service, ordered the close of trade on the two Russia's main stock exchanges Micex and RTS. Trade is suspended on the Micex exchange every time the index falls 10% below the index value at close of trade the following day. On the RTS exchange there is a 5% threshold.

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