Russia extended emergency state support available to financial markets to $130 billion on Thursday to help prop up sinking stocks and improve liquidity after the worst stockmarket losses in a decade.
Share trading on Russia's two main exchanges was shut for a second day and foreign exchange reserves were down $13 billion on a week ago — a sign the government was actively using its cash pile to prevent the rouble slumping amid a capital flight.
Analysts estimated investors have taken about $36 billion out of Russia since early August, when a brief war with Georgia, combined with a fall in oil prices and global financial turmoil, turned Russian shares from must-have assets into toxic paper.
Worries persisted about Russia's banking sector after inter-bank lending almost ground to a halt and a mid-sized private brokerage was rescued by a state-owned fund.
"The single biggest priority right now is to prevent a run on the banks," said Chris Weafer, chief strategist at brokerage Uralsib.
President Dmitry Medvedev said the country's financial market will receive a total of 500 billion roubles ($19.6 billion) of additional support, including half from the budget.
Finance Minister Alexei Kudrin, the government's main fiscal hawk who previously opposed tax cuts for the oil sector, said the industry would receive an unexpected $5.5 billion cut in export duties because of a sharp decline in oil prices.
New measures bring the total amount of promised state support to financial markets to over $130 billion, including 1.5 trillion roubles of budget funds going to banking deposits, 1 trillion available via repo operations and some 300 billion that banks freed up after a cut in reserve requirements.
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"Unlike a week ago, the government and regulators have finally changed their mind and recognised the existence of financial crisis," Raiffeisen Bank said in a flash note.
"Although we do not expect the end of the crisis, large liquidity injections and the plan to lend money to stock market operators should put some sort of floor under the money market and perhaps may be stocks," it added.
Kudrin says trading in stocks will resume on Friday and added the top banks would lend $2.4 billion to market players.
The fall in Russia's stock markets since May has been steeper than in other emerging markets, with many in the market attributing that in part to the increased political risk from Russia's military intervention in Georgia.
MONEY MARKET RATES FALL
The domestic political impact has so far been limited because private share ownership in Russia is small, but some analysts say the pressure for greater state intervention in the markets could derail Medvedev's agenda of liberal reforms.
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Russia's benchmark RTS is now down around 60 percent from its peak levels in May and the country's authorities said the situation was extraordinary but mostly driven by a crisis of confidence rather than a liquidity crisis.
Kudrin also said overnight he received assurances from United States Treasury Secretary Henry Paulson that U.S. decisions in the financial sphere were not driven by politics.
The statement sought to address market rumours that the exodus of foreign investors is a retaliation by the West against Russia, which last month sent tanks to repel an attack by U.S. ally Georgia on its breakaway province of South Ossetia.
On Thursday, the finance ministry and the central bank kept pumping liquidity into the banking sector. Lending between banks nearly dried up after problems at medium-sized brokerage Kit Finance sparked speculation there could be bigger victims.
The state helped rescue Kit on Wednesday when management firm Leader, part of the business empire of Russian state gas giant Gazprom, said it would buy the brokerage.
"(The deal is) very reminiscent of the Bear Stearns bailout and that too left investors wondering if Russia will have a Lehman-style follow on," said Weafer.
Massive liquidity injections and a slash in banks' reserve requirements led on Thursday to a decline in money market rates to 8.0-8.5 percent from 10.0-10.5 percent.
In another sign of easing liquidity problems the central bank injected 186 billion roubles of one-day funds via a repo auction — or less than half of the funds on offer.
The rouble stood firm versus the dollar/euro basket at 30.38 as dealers said the central bank sold a further $1.5 billion on Thursday to support the national currency.
Russian reserves fell by $13 billion in the latest week as the government moved to protect the rouble from capital flight.
Despite Kudrin's assurance trading would resume on Friday, Russia's markets watchdog said it had indefinitely suspended margin trading, when investors effectively borrow money from the broker to do their trades, and short selling, or bets on a fall in an asset's price.
