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16 Apr, 2008 08:44

Government raids coffers to keep banks afloat

The government has started using billions of dollars from Russia’s stabilisation fund to soften the impact of the global credit crunch at home.

Russia's top banks, those with international ratings and equity capital, are being invited to bid for up to $US 25 billion of government money.

Neil Withers of Vozrozhdenie Bank says the measure is intended to make banks stop borrowing abroad.

“In a way it's a bit of a protective measure against there being a crisis. It will help keep money flowing to companies in Russia, and individuals – mortgages for instance – that otherwise would have depended on borrowing money internationally,” he said.

Analysts say the move is a prudent one, in line with the U.S. system of treasury securities.

But senior analyst at Unicredit Aton, Rustam Botashev, warns the economy may suffer if the banks push the government too far.

“I think we will see inflation rise, especially if this money is deposited for a longer term. Initially, it’s being suggested for the shorter term, but the banks are constantly asking to increase the terms, maybe for years,” he said.

Russia's banking system has so far coped relatively well with the credit squeeze, although opinions are divided on how well it will continue to weather the storm.

The country's soaring inflation on the other hand – identified by the IMF as the country's most pressing economic challenge – is already a very clear and present danger.