DEVALUATION THREAT TO ROUBLE: RUSSIA PROPS UP BANKS WITH $40 BILLION
Carl Mortished

The Times
February 5, 2009

Russia’s Government yesterday threw a $40 billion (£27.6 billion)
lifeline to its banks as the rouble suffered another pounding,
prompting further speculation that the country would be forced into
a formal devaluation.

In London, Alexei Kudrin, Russia’s Finance Minister, hinted at budget
cuts as his country grapples with high inflation, a depreciating
currency and the collapse in value of oil and gas, Russia’s main
exports.

The dollar value of the Russian currency fell to within a few kopecks
of 41 roubles, the floor at which the central bank is committed to
defend the currency by selling dollars. The rouble has plunged by
almost 40 per cent in six months, despite the expense of hundreds of
billions of dollars in foreign currency in its defence.

Mr Kudrin, who yesterday had talks with Alistair Darling, the
Chancellor, said that Moscow was making available $40 billion to invest
in the capital of banks. "We are preparing one more banking package to
the tune of around $40 billion in Tier 1 and Tier 2 capital support,"
he said, adding: "We are preparing the banking package, but with the
condition that the funds will be passed on to the real economy."

Confidence in Russia’s economy suffered a new blow when Fitch, the
ratings agency, said it was cutting its sovereign credit rating for
Russia by a notch to BBB, because of continuing capital outflows of
dollars from the country. The new rating is two notches above "junk"
status and Fitch said that it was at risk of further downgrades.

Mr Kudrin said that the Government had no plans to raise funds on
capital markets, noting its reserves of almost $400 billion. "The
budget deficit is covered by reserves," he said. "For the next two
to three years, we are fully committed to fulfil the Government’s
obligations to pay wages, pensions."

However, the Finance Minister hinted that spending would be shaved.

Referring to infrastructure programmes, he said there would be
"certain adjustments, cutbacks of between 15 and 20 per cent".

Mr Kudrin said that Russia was also supporting its neighbours with
loans. In response to requests that had been made for assistance,
he said that Russia would lend $2 billion to Belarus, $500 million
to Armenia and $2 billion to Kyrgyzstan.

The European Bank for Reconstruction and Development (EBRD) yesterday
expressed doubt about whether Russia could continue to finance itself
from currency reserves.

Thomas Mirow, the president of the EBRD, said: "It depends on how
long the crisis prevails. If it lasts longer than 2009 and 2010,
then the reserves could be exhausted."

Russia0s foreign exchange reserves have dwindled from $600 billion at
the start of the financial crisis, last summer, to $386 billion. Last
week, its central bank spent $10 billion defending the rouble as
dollars fled the country.

Mr Kudrin said that Russia’s dependence on oil was its main challenge.

However, addressing a business conference in London, he also
blamed his country’s plight on an expansion of credit and a lack of
strong financial institutions. "We had a low level of competition,
a high level of state intervention and poorly developed financial
institutions," he said.

Russia’s Government seems to have shifted its focus from rescuing big
industrial groups to the plight of its fragile financial system and a
wish to shelter ordinary people from financial turmoil. Igor Shuvalov,
the First Deputy Prime Minister, said that a $50 billion fund set up
to help private companies to repay foreign debts had been suspended.

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