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Russia increases liquidity of its 3 largest banks with 44.9 billion dollars

Russia moved to bolster an increasingly stressed banking sector Wednesday, as the global economic turmoil deepened fears that the country could face a crisis similar to its financial collapse of 10 years ago.

Russia's primary stock indexes, MICEX and RTS, plummeted, with banking stocks leading the way, prompting regulators to suspend trading for the afternoon.

The Finance Ministry said it was increasing liquidity for the country's three largest banks, raising lending to 1.12 trillion rubles (US$44.9 billion). The country's top banks - Sberbank, VTB, and Gazprombank - will be loaned federal funds for a minimum of three months, the ministry said.

"These are market-making banks capable of insuring the liquidity of the banking system," the Finance Ministry said in a statement.

"Essentially we're counting on them as core banks to be able to lend to small and medium banks," Finance Minister Alexei Kudrin said in televised comments.

Natalya Orlova, chief economist at Alfa Bank, said the situation was more serious than initially believed.

"The reason is a lack of trust. A number of banks are trying to estimate which banks are facing losses," she said.

Boutique investment bank Kit Finance was poised to be the first victim to the crisis. The bank confirmed Wednesday that it had defaulted on some short-term borrowings and was seeking a strategic investor.

The move came a day after Russian stocks plummeted to their lowest level in nearly three years as tumbling oil prices and Wall Street turmoil focused concern about Russia's commodity-driven economy.

The Central Bank on Wednesday said that for the third day in a row, its daily "repo" liquidity had been fully used by banks after it provided 340 billion rubles ($13.3 billion). The daily auctions are used to loan money to domestic banks.

On Tuesday, the Central Bank had provided a record 361 billion rubles (US$14.1 billion) at that day's auction.

Russian stock indexes edged up in early trading, but then resumed their decline. Both the benchmark RTS and the ruble-denominated MICEX fell by more than 10 percent at one point, before MICEX climbed back to a 3 percent decline just before regulators suspended trading on both exchanges at 12:10 p.m. (0810 GMT).

Shares in Sberbank and VTB fell 9.6 percent and 15.7 percent, respectively.

Fearing that Russia's economy could face a repeat of the 1998 economic crisis - which saw the ruble devalued, default on the country's sovereign debt, and widespread bank foreclosures - the government has promised to pump more money into the banking system.

Russian banks face a crunch period in October, when quarterly value added tax payments are due. They will also have to pay back the short-term money borrowed from the government.

Analysts said banks are starting to close their doors to second and third-tier borrowers.

Many ordinary Russians saw life savings wiped out by the 1998 crisis which saw banks fail and the government default on sovereign debt. After 1998, the government moved to set up a deposit insurance system that would keep depositors from losing their money.

Chris Weafer, chief strategist at UralSib bank, said investors are panicking, even though Russia's underlying economic fundamentals are sound.

"The market is trading as if it is close to a default," Weafer wrote in a note to investors Wednesday. "In reality it has the world's third largest financial reserves and is still earning about US$850 million everyday from crude, oil products and gas exports."