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18.09.2008 - MDM Comment: Russia's trading freeze makes sense

In our view, there are persuasive arguments to support the decision Russian regulators took to call a halt to trading in order to arrest what appeared to be a self-perpetuating downward spiral in Russian debt and equity markets. The truth is that the lion’s share of the latest cash injections announced by the government and the Central Bank has de facto not yet reached the financial system.
The RUB1 trn plus deposit offering for the top three banks (Sberbank, VTB, Gazprombank) will effectively take place on Monday next week. Furthermore, the release of almost RUB300 bn in obligatory banking reserves, announced yesterday and effective today, will technically be executed tomorrow. By the way, this latest measure, unlike many others, will help every single bank in Russia pro-rata to its balance sheet size.
Finally, the bail-out of KIT Finance Bank, which we were confident would happen, also took some time to orchestrate. An announcement was made this morning that the bank will be absorbed by its key client, Leader Asset Management, an entity controlled by the Gazprom/Gazprombank group. The transaction will be co-funded by Gazprombank and VTB. We understand that KIT is now paying back on its repo liabilities, which should reduce tensions in the inter-bank market and relieve some of its counterparties.
Russia's financial markets regulator has also prohibited short-trading and margin trading, as well as sale of collateralized assets following margin calls until the borrowers top up cash. While the actual enforcement of these directives is quite unclear, we believe that many market participants will in fact choose to follow the rules.
The above considerations provide some basis for cautious optimism with regard to how the situation may develop once the markets fully re-open for trading.

18.09.2008 12:26
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