RUSSIAN MARKETS CLOSE BRIEFLY AFTER "BAILOUT"

C O N F I D E N T I A L MOSCOW 002900 SIPDIS STATE FOR EUR/RUS, EEB/IFD TREASURY FOR TORGERSON DOC FOR 4231/MAC/EUR/JBROUGHER NSC FOR ELLISON E.O. 12958: DECL: 09/30/2018 TAGS: EFIN ECON RS SUBJECT: RUSSIAN MARKETS CLOSE BRIEFLY AFTER "BAILOUT" FAILS TO PASS Classified By: ECON MC Eric T. Schultz, Reasons 1.4 (b/d). -------------- Summary -------------- ¶1. (C) One minute after the trading day began on September 30, the Federal Financial Markets Service (FFMS) suspended trading for two hours apparently in anticipation of a meltdown in reaction to the Congressional vote against the Paulson Plan. According to press reports, the FFMS "special order" had been prepared late on September 29 once Congress voted against the Plan. The suspension of trading was designed to give time for the GOR's September 29 announcements of further support to the markets to take effect. When the markets opened two hours late, they initially fell but then stabilized by the end of the trading day with a modest gain on the previous day's close. Our contacts applauded the GOR's efforts to prevent Russia's financial crisis from worsening today but retain reservations that the CBR's new support measures could delay much-needed banking sector consolidation. End Summary. -------------- FFMS Orders Trading Suspension -------------- ¶2. (U) One minute after the trading day officially began on September 30, the Federal Financial Markets Service issued a "special order" to suspend trades for two hours. On September 29, the FFMS reportedly prepared the order to halt the next day's securities trading when news emerged that the U.S. Congress had voted against legislation on the so-called Paulson Plan, whose passage many investors had hoped would put Russian stocks back on an upward trajectory. News of the large losses on U.S. bourses following the vote in Congress prompted the FFMS to prepare a contingency plan for Russia, according to various print and broadcast media sources. The news services for the main exchanges, RTS and MICEX, reported that a "significant" number of sell orders had been submitted overnight following the declines in the U.S. and Asia. When trading finally resumed, the RTS and MICEX indices quickly fell about 2 percent before recovering to an estimated 1.5 percent gain from the September 29 close. -------------- Additional Support Measures -------------- ¶3. (U) The FFMS suspension order came amidst reports that, on the evening of September 29, the government was planning new measures to provide liquidity. Putin subsequently announced that the toolkit of financial resources would increase beyond "loans" of budget funds, lower bank reserve requirements, fiscal policy adjustments, and open market operations of short-term government debt. The "increase," Putin said, would be to allow the Central Bank to play a larger role in furnishing liquidity, which would be available to smaller banks that do not normally enjoy access to the CBR's short-term loans as well as any Russian firm in need of funds to pay foreign debts. ¶4. (U) Under the new initiative, the Development Bank (aka Vneshekonombank, VEB) is to receive in the near term approximately $50 billion of the CBR's foreign exchange reserves to assist Russian firms and banks to meet their foreign debt obligations. Citibank Russia's Managing Director for Fixed Income Eugene Belin called this the GOR's boldest move to date to mitigate the effects of the global financial crisis on Russia. Any Russian firm in need of cash to make payments on any foreign debt incurred before September 25 would be able to file an application with VEB to receive the funds. However, Belin said that no details were as yet available regarding the size or the repayment terms of the loans firms would be eligible to receive toward their foreign debts. ¶5. (U) The CBR would also increase the number of banks eligible to receive its no-collateral overnight loans. Currently, this lending is limited to the large state-owned banks (e.g., Sberbank, VTB and Gazprombank) and private banks with more than $5 billion in charter capital, according to MDM Fixed Income Analyst Mikhail Galkin. No details were available regarding the requirements for qualifying for the no-collateral loans, Galkin told us. ¶6. (U) Finally, Putin said the CBR would provide favorable terms to banks that had defaulted on their overnight loans on the interbank market. Ensuring that banks had the resources to meet their obligations would help sustain vital interbank lending and avoid the uncertainty that led to a suspension in securities trading on September 17, Putin noted in public comments. Galkin said that he could appreciate the motivation behind supporting the interbank lending market but speculated that the proposal was a short-term initiative to stave off another panic. -------------- An Ideal Short-Term Solution -------------- ¶7. (C) Galkin told us that these measures deserve high marks for creativity, as long as they are short-term uses of public funds. The GOR recognized the need to take action to prevent a meltdown in the markets that could have led to a prolonged crisis of confidence. However, he said the GOR should be prepared to allow firms to fail if they are unable to repay loans sourced from CBR reserves. ¶8. (C) Belin concurred that giving non-bank firms access to the CBR's reserves was a risky proposition over the long term. He speculated to us, however, that opening the CBR's short-term lending facilities to more banks would not necessarily be life support for otherwise insolvent banks. In the event these smaller banks defaulted on their loans, the CBR could begin a low-profile process of closing the bank or finding a buyer in a way that could maintain a sense of calm in the country's financial sector. -------------- Comment -------------- ¶9. (C) The GOR has raised the profile on its actions to shore up the financial sector and has demonstrated flexibility in addressing concerns stemming from the global crisis. Increasing the availability of credit domestically, however, has not staved off plummeting confidence and may not be sufficient to stem capital flight or a continuing decline in the markets in the near term. BEYRLE