Wall Street crisis spreads to Russia; stock markets in freefall

The Russian finance ministry has stepped in to ease the liquidity crunch in Russia by injecting 44.9 billion roubles into the three main banks - Sberbank, VTB and Gazprombank, as the two major Rusian stock markets RTS and MICEX went into a freefall with trading having to be suspended.

The Russian markets regulatory body Federal Financial Markets Service stopped all trading in the RTS - Russia's dollar-denominated exchange and the MICEX - the rouble-denominated exchange, after equities fell sharply and refused to rally during early trading at midday yesterday.

Trading was suspended on both exchanges after the RTS fell by 6.39 per cent and the MICEX by 3.09 per cent respectively. The stock markets remained closed all day. This drop was the worst since the Russian financial crisis in 1998.

This was the second time the regulator had to intervene since Tuesday, when trading on both exchanges was suspended as the RTS fell by 11.47 per cent and the MICEX was down by 17.45 per cent.

Stocks of Russian oil companies OAO Gazprom and OAO Rosneft, fell after crude tumbled more than $3 a barrel. Gazprom, sank by 18 per cent to 158.41 roubles and Rosneft, Russia's largest oil company, sank 22 per cent to 132.20 roubles.

The fall reflects the unfolding drama on Wall Street and the cascading effect it had on exchanges the world over after the collapse of the fourth largest American investment bank Lehman Brothers filing for bankruptcy protection.

According to media report quoting sources said the Central Bank officials and the Federal Service for Financial Markets would meet with leading stock market players to discuss ways to ease the liquidity crunch and how to stabilize the situation.

Markets overseas have been exposed to repeated shock treatments over the extraordinary failure of three of the top US financial institutions - Bear Sterns, Lehman Brothers and Merrill Lynch and with the $200-billion bail out of Fannie Mae and Freddie Mac and now the rescuing of embattled insurance giant American International Group with a Federal Reserve's emergency loan of $85 billion.

Surprisingly in June, an International Monetary Fund mission had said in its report on Russia, "There are no significant negative spillovers from the global financial market turmoil," and rightly so, as Russia was experiencing a economic boom with prices of commodities such as oil hitting the roof.

The Russian markets although have not been immune to the meltdown in the US and have been volatile since July. The RTS had lost 64 per cent of its value, equivalent to some three-quarters of a trillion dollars. This was also due to the subsequent decline in oil prices, which dropped from July's $147 per barrel to approx $94 on Wednesday. Russia's economy is heavily dependent on oil and other commodities revenue.

Added to this, was the high-profile corporate conflict like the British-Russian TNK-BP oil venture dispute, as also the attack by Prime Minister Vladimir Putin on steelmaker Mechel. Many portfolio investors took their money to safer markets when the Georgian conflict started which resulted in ongoing tensions between Russia and the West especially the US.

Banks and loan syndicates were forced to lend in the domestic market where international lender shied away and Russian companies are heavily dependent on international lenders who have no excess liquidity to offer as banks are hoarding capital after Lehman's collapse to fund further possible writedowns.

Analysts opine that investors in Russian stocks have been selling due to many reasons, mainly the falling commodity prices, turmoil in international financial markets and unpredictable actions by the Russian government.

According to official figures released on Monday Russian growth has kept pace with the economy, growing by 7.5 per cent in the second quarter after an 8.5 per cent growth in the previous three months.

Of the BRIC emerging stock markets, China, is down 60per cent, Russia is down 50, and Brazil and India around 25 per cent.

Russian foreign exchange reserves have fallen by $24 billion since the starting of the Georgian conflict but with $573.6 billion as of Sept.5, it still has the third largest reserves in the world.