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Russian Stocks Remain Suspended, Reserves Sink

Russian President Dmitri Medvedev (center) presides over meeting on economic issues in the Kremlin on September 18.
MOSCOW (Reuters) -- Russian authorities pledged a further $25 billion in support to financial markets but stock trading was shut for a second day after the worst losses in a decade while foreign exchange reserves fell by $13 billion.

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 interbank lending almost ground to a halt and a midsized 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.

Lars Christensen, head of emerging markets research at Danske Bank in Copenhagen, said the outflow from Russia could accelerate if the situation worsens globally.

"We have been so bearish, but have still underestimated how bad it could get," he said.

Falling Since May

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.

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 play into the hands of hawks in the Kremlin.

Russian Finance Minister Aleksei Kudrin says trading on the country's stock markets will resume on September 19 and added the country's top banks would lend $2.4 billion to market players.

President Dmitry Medvedev said the country's financial market will receive a total of 500 billion rubles of additional support, including half from the budget.

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 the crisis of confidence rather than a liquidity crisis.

The Finance Ministry also said overnight it received assurances from U.S. Treasury Secretary Henry Paulson that U.S. decisions in the financial sphere were not driven by politics.

The statement sought to address the rumors 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 Septembe 18, the Finance Ministry and the Central Bank kept pumping liquidity in the banking sector as 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 September 17 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.

Signs of Easing

The Finance Ministry pledged on September 17 a liquidity injection of nearly $60 billion and on September 18 offered 200 billion rubles ($7.84 billion) of budget funds to banks at an auction, which will take place later in the day.

There were signs though the liquidity problems may be starting to ease after the Central Bank slashed banks' reserve requirements.

The Central Bank injected 186 billion rubles of one day funds via a repo auction -- or less than half of the funds on offer -- and money market rates fell to 8.0-8.5 percent from 10.0-10.5 percent.

The ruble stood firm versus the dollar/euro basket at 30.37 as dealers said the central bank sold a further $1.5 billion on September 18 to support the national currency. Russian reserves fell by $13 billion in the latest week as the government moved to protect the ruble from capital flight.

Despite Kudrin's assurance trading would resume on September 19, 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.

It earlier blamed both instruments for the market slump.

RFE/RL Russia Report

RFE/RL Russia Report

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