Thursday, September 18, 2008

Russian Situation Looks Grim After Stock Market Plunge

Sources: Financial Times, Medvedev pledges $20 bn liquidity boost; Russia halts trading after 17% share price fall; Moscow share trading remains suspended

Despite President Medvedev's assurances last weak that the blow to the Russian economy was only temporary and despite repeated liquidity injections, this week did not look good for Russian investors. The stock market showed catastrophic losses Tuesday when falling oil prices combined with poor money market conditions to prompt mass selling on the two major exchanges.

Both the Micex and RTS stock exchanges suspended trading at the urging of state regulators, but already the single-day drop in prices was the greatest for Micex since the August 1998 financial crisis. Traders forced to meet margin calls and brokers pulling their credit lines contributed to the plunge, but perhaps the worst aspect is loss of confidence in the system.

KIT Finance, a mid-sized Moscow brokerage firm, was unable to make payments on short-term loans, and there were rumours that other banks might fail as well. This made banks unwilling to lend to each other, and so a finance ministry injection of $5.8 billion into the banking system did not spread throughout it due to freezes on interbank lending. The interbank money market rates reached 11%, though by Thursday they were back down to 7-8% for the largest banks.

It remains to be seen whether the government will be able to save the situation with both lenders and borrowers afraid to participate in the economy. Alexei Kudrin, Russia's finance minister, insisted that the crisis is not systemic, but at the same time the central bank injected $14.16 billion into the money market in a single day, with its deputy reporting that the bank and the finance ministry could inject a total of $117.6 billion.

Large state-run banks were hardest hit, with stocks in Sberbank losing 21.76% of their value on Tuesday alone. The Micex exchange closed on Tuesday at 17.75% down, and the RTS at 11.47% down. In the past few months, the exchanges have lost nearly $800 billion in value.

With the exchanges planned to re-open on Friday, two more pledges came in – one from President Medvedev promising $20 billion and the other from the finance ministry, announcing a plan to put $59.1 billion in short-term deposits into three state-run banks. Other government measures include reducing oil export taxes to increase companies' cash balances, banning margin selling and short-selling on new accounts, and an order to state banks to open a sixty billion ruble credit line to the largest participants in the market.


1) How does this crisis compare to the August 1998 ruble crisis?
2) Is the country's stronger financial structure enough to keep the crisis from becoming "systemic," as Kudrin suggested, or was this crash the inevitable result of an overheated emerging economy?

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