Bloomberg News

Russia Pledges Further $50 Billion Liquidity Boost

September 29, 2008

Russia's government pledged to provide a further $50 billion to increase liquidity in the banking system and fight ``contagion'' that has spread from the U.S., Prime Minister Vladimir Putin said.

The money will be made available to banks and companies to help them pay foreign loans taken before Sept. 25 and will be transferred from Russia's international reserves to the state-run development bank, Deputy Economy Minister Andrei Klepach said today on Vesti-24.

``American authorities have not managed to handle the economic problems and obvious financial crisis'' in the U.S., Putin told government officials, according to the government's Web site. ``Once again we can say with regret that the contagion has moved into the European financial system.''

The liquidity boost comes in addition to a $100 billion crisis package comprising loans to banks, tax cuts and delayed tax payments. The government was forced into action by investor flight triggered by last month's five-day war in Georgia, a drop in commodities prices and the seizure in global capital markets after the bankruptcy of Lehman Brothers Holdings Inc.

Stock trading was suspended for two days the week before last after record declines as foreign investors pulled out $56.7 billion between Aug. 8 and Sept. 19, BNP Paribas SA estimates.

Psychological Boost

``Psychologically, this is very much needed,'' said Natalia Orlova, the chief economist at Alfa Bank in Moscow. ``It will help to restore confidence in the interbank market.''

The Mosprime overnight rate today rose to 7.8 percent from a two-month low of 4.3 percent on Sept. 24. Russia's Micex Index dropped the most today since regulators closed local stock markets on Sept. 16, led by OAO Sberbank, on concern more European banks may fail, with repercussions on liquidity and borrowing costs in the country.

Putin presented other proposals for bolstering the banking sector. They included allowing the central bank to offer loans to banks without the need for collateral. VEB, or Vnesheconombank, should receive 75 billion rubles in budget funds to bolster its capital this year, Putin said.

``Any Russian bank or company can apply to Vnesheconombank to receive a loan to pay debts to foreign creditors on loans taken before Sept. 25 this year. The terms of the loan must, of course, be market based,'' Putin said.

To contact the reporter on this story: Alex Nicholson in Moscow at anicholson6@bloomberg.net

To contact the editor responsible for this story: Chris Kirkham at ckirkham@bloomberg.net


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