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Bank Rossii Eases Further As Russia's Economy Contracts At A Record Rate

The ECB's Balance Sheet At A Glance.

Wednesday, October 22, 2008

As S&P Cut The Credit Rating, Russia's Crisis Wends On Down Its Long Winding Road

Russia's long-term sovereign credit rating outlook was lowered yesterday (Thursday) - to negative - by Standard & Poor's Ratings Services due to their assessment that the cost of the government's "bank rescue operation'' may increase. S&P cut their outlook from stable, a move which reflects the increased probability of a downgrade at some point in the future. Russia has committed as much as 15 percent of gross domestic product in budgetary and reserve funds to maintain banking liquidity, according to calculations made by the rating agency. At the same time S&P affirmed Russia's BBB+ long-term foreign currency and the A- long-term local currency ratings and the short-term ratings of A-2.

``We expect Russian corporate and financial sector default rates to increase as
debtors' access to official funds will vary,'' S&P said in the statement.
``Other uncertainties remain regarding what the economic policy response will be
to weakening growth, and whether the ongoing concentration of the financial
system in state hands is permanent or temporary.''

Russia's reserves fell $14.9 billion last week to $515.7 billion according to the latest data from the central bank. This was the third straight week of decline, and the fall comes after the central bank sold foreign currency to prop up the ruble. Obviously there are plenty of reserves left, but this is down from around $550 billion in August, so it can't go on forever, either. The ruble weakened yesterday by as much as 0.5 percent to hit 27.0664 to the dollar at one point, the lowest since July 2006. It later rebounded and was 0.1 percent lower on the day at 26.9538 at the close in Moscow.

Russian government bonds fell, with the yield on the 7.5 percent bond due 2030 rising 8 basis points to 10.94 percent, the highest for more than six years. The 12.75 percent bond maturing 2028 yielded 10.56 percent, up 84 basis points to a six-year high. The yield on the 11 percent bond due 2018 jumped 93 points to 8 percent, the most since 2004.

Micex Closes Again

Russia's Micex Stock Exchange slid again today, and suspended trading at 2:10 p.m. until next week. The next session will start on October 28, but with the Russian bourses now closed almost as often as they are open, it is hard to be sure about anything at this point. The so-called technical index fell more than 10 percent, triggering the halt, according to information available on the stock exchange Web site.

Russian stocks dropped for a third day, led by banks, on concern the turmoil in the country's equity markets is spreading to bonds and the ruble. OAO Sperbank, Russia's largestest bank, slid 15 percent and VTB Group, the second-largest, dropped 3.9 percent following a decline in Asian financial stocks. OAO Rosneft tumbled 9.4 percent as oil fell.

Crude dropped 1.7 percent to $69.68 a barrel in New York trading yesterday, after slumping 4.5 percent on Wednesday. Urals crude, Russia's export blend, fell 4.3 percent to $66.16 a barrel. Urals needs to average $70 a barrel next year for the country's budget to balance, according to the Finance Ministry.

Aid For The Crisis Hit Property Sector

Russia's government will decide "within days'' on how to help developers and reassure banks on loans for the building industry during an economic slowdown, according to Arkady Dvorkovich, an economic aide to President Dmitry Medvedev. Construction, agriculture, machine-tools building and retail are the non-financial industries the government plans to boost, along with small businesses across the economy.

Dvorkovich told reporters that the Russian government is discussing two possible mechanisms to help reassure banks vis a vis their lending to construction companies.

The government may offer to buy unsold apartments at a fixed price in residential buildings that are still under construction, once the buildings are completed. Another possibility is that the OAO Agency for Housing Mortgage Lending, the state-run mortgage agency, will refinance loans once construction of a residential building is completed.

Finance Minister Alexei Kudrin said earlier in the week that Russia's "overheated'' construction industry is facing difficult times,. Bank loans to construction companies increased 80 percent last year, compared with a 64 percent increase in borrowing for real-estate purchases, a sign that developers are over-building, according to Kudrin.

Soyuzcement, an industry group, have reported that cement producers are reducing plans for new factories as the credit crunch derails construction projects, while companies in industrial and services sectors right across the Russian economy are cutting back on jobs and investments.

Russia plans to establish a margin of spare oil production capacity as an alternative to cutting output, in order to indirectly influence prices according to Deputy Prime Minister Igor Sechin. He said Russia would not be joining in the OPEC cut back and argued that maintaining extra output capacity may allow Russia to produce oil ``at a volume that would allow more effective price parameters to be reached, ". According to Sechin "Oil has become more of a financial instrument than a commodity.''

Russian state revenue will more than likely fall sharply as the price of oil, the country's biggest export, plunges and capital flight accelerates on concern the global economy will enter a recession.

Russian companies and banks have applied for almost $100 billion of loans from state development bank Vnesheconombank to refinance foreign debt after credit markets worldwide seized up, threatening economic growth. Banks have asked for $64 billion, while companies have requested $33 billion, according to bank Chairman Vladimir Dmitriev. The bank's supervisory board plans to review the first 10 projects, from commodities and manufacturing companies, "in the near future". Prime Minister Vladimir Putin is chairman of the bank board.

Russia's government allocated $50 billion to Vnesheconombank, or VEB, as part of a more than $200 billion package to stem the country's worst financial crisis since 1998. Companies can apply for loans of between $100 million and $2.5 billion, Dmitriev said Oct. 13. Vnesheconombank will receive rescue funds after reviewing applications, Dmitriev said today.

Russian companies may default on almost a third of local-currency bonds as soaring borrowing costs make it "impossible'' to refinance the debt, according to Denis Gaevski, head of capital markets at Bank of Moscow, which the third-biggest arranger of ruble bonds. Companies may default on between 20 and 30 percent of the bonds, with retailers particularly vulnerable, he said.

Russian companies are estimated to have sold 406 billion rubles ($15.2 billion) of bonds this year, with almost all of the sales taking place before August, when Russia's invasion of Georgia triggered an investor exodus during which around $63 billion have left the country, according to a UniCredit estimate.

The average price of ruble-denominated corporate debt dropped to an all-time low of 86 percent of face value on Wednesday, from more than 100 percent in June, according to the MICEXCBI index of bonds traded on Moscow's Micex Stock Exchange. Bonds payable in 2009 by Moscow-based property developer Mirax Group traded for as little as 30 percent earlier this month, and were priced at 54 percent of face value in the middle of this week.

The average interest rate Russian banks charge to lend money to each other overnight - the so called MosPrime rate - oreached a record 21 percent last week, but was back down to 7.67 percent yesterday.

Slumping commodities prices, the war with Georgia and the seizing up of global capital markets prompted investors to pull money out of Russia, despite the best efforst of the Russian government to restore confidence and to inject money into the system to brake the slowdown. Last month the Russian government has pledged more than $200 billion for banks and companies to stem the worst financial crisis since 1998.

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