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Devaluation Threat To Rouble: Russia Props Up Banks With $40 Billion

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  • Devaluation Threat To Rouble: Russia Props Up Banks With $40 Billion

    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.

    --Boundary_(ID_tin5/dx6wJ0WBjt7hRk/4Q) --
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