LONDON - The Russian finance ministry has thrown a $44.9 billion lifeline to three of the country's leading banks, as Russian shares plunged on Wednesday morning in Moscow and major exchanges put a freeze on trading. Yet as liquidity dries up and investor confidence tumbles to decade lows, this may not be the last time the Kremlin intervenes.
"I'm afraid it's not going to be enough to just once inject $50.0 billion into the system," said Ovanes Oganisian, a Moscow-based strategist with Renaissance Capital. "They will have to repeat it."
Russian market authorities halted trading on both the RTS and MICEX stock exchanges at midday on Wednesday, after tumbling equities refused to rally during early trading. The dramatic developments on Wall Street this week have pummeled Russian investor confidence; Moscow shares have been especially vulnerable in comparison with other emerging markets because of this summer's fall in oil prices and the uncertainty surrounding Russia's conflict with Georgia. (See "Russia Not Out Of The Woods.")
The Market Vector Russia (nyse: RSX - news - people ) Exchange-Traded Fund Trust fell 7.9%, to $28.11, on Tuesday, and has fallen 16.7% since Monday. Major energy stocks like Lukoil (other-otc: LUKOF - news - people ) and Gazprom (other-otc: OGZPY - news - people ) have also suffered a sharp sell-off as energy prices take a hit from slowing demand and the financial crisis.
But the new drama facing Russia is more in step with the global liquidity drought than any specific domestic issue, which is why Russia's finance ministry decided to step in on Wednesday and increase liquidity for Sberbank, VTB and Gazprombank to 1.12 trillion rubles ($44.9 billion). These three top banks will be loaned federal funds for a minimum of three months.
The question going forward will be how much this crisis affects Russia's domestic economic growth, and whether it will result in a meltdown comparable to the economy's last major crisis in 1998. Back then, Russia defaulted on its debt and devalued the ruble after a crash in investor confidence.
"The key risk factor in the next two months… is the position of second-tier banks," said Natalia Orlova, economist with Alfa Bank, referring to firms that would not benefit from the finance ministry's injection. "We believe that the best measure would be a significant emergency cut in reserve requirements," she added, estimating that a 50.0% cut in requirements would provide 200 billion rubles ($7.8 billion) for the banking sector.