By Denis Maternovsky and William Mauldin
Sept. 26 (Bloomberg) -- Russian stocks slumped, led by financial shares, after Moody's Investors Service assigned a ``negative'' outlook to the country's banking system as it grapples to contain its worst crisis since the 1998 default.
OAO Sberbank, Russia's largest lender, dropped 5 percent to 43.73 rubles, the biggest decline since regulators halted stock trading last week. The cost to protect bonds sold by VTB Group, the second-biggest lender, rose 3 basis points to 740, close to a record of 750, according to credit-default swap prices from CMA Datavision.
Russia suspended trading for two days and pledged more than $100 billion in emergency funding last week as the seizure in capital markets, falling oil and last month's five-day war in Georgia drove away investors. Banks have been slow to restrict lending, adding to ``structural weaknesses'' that may harm their ability to repay debt and attract financing, Moody's analyst Andrey Artyukhin said in the report today.
``Russia was considered a safe haven but now people are realizing it's no safe haven whatsoever,'' said Eugene Belin, head of fixed-income, currencies and commodities for Citigroup Inc. in Moscow.
The Micex Index of 28 companies declined 1.5 percent to 1,079.65 at 5:29 p.m. in Moscow, extending its 2008 retreat to 43 percent. Russian government bonds fell, raising the yield on the benchmark 30-year dollar note by 8 basis points to 6.98 percent.
Investors Flee
Foreign investors pulled $56.7 billion from Russia between Aug. 8 and Sept. 19 as troops entered neighboring Georgia, based on BNP Paribas SA's data.
Markets deteriorated in Moscow after brokerage Kit Finance defaulted on some repurchase agreements, before agreeing to be bought by ZAO Lider, a finance unit of state-run OAO Gazprom. The Finance Ministry attempted to insulate banks by offering 1.13 trillion rubles of budget funds to Sberbank, VTB and Gazprombank for at least three months.
The International Monetary Fund said yesterday that there are ``no systemic risks'' to Russia's banking system and that the authorities are working ``appropriately'' to boost liquidity. Moody's said its view doesn't reflect potential debt rating changes.
International Reserves
Russia's international reserves, the world's third- largest, fell $900 million last week to the lowest in three months after the central bank sold currency to support the ruble.
Russian lenders may be forced to rely on the central bank to refinance some of the $20 billion of bonds and loans that are due by the end of next year, said Mikhail Galkin, a fixed income analyst at MDM Bank in Moscow.
The worsening perception of the sector may make it ``even harder to raise funding,'' Galkin said. ``They would have to shift focus to deposits and use the funding available from the central bank.''
The amount banks must raise to cover debt repayments is ``insignificant'' compared with almost $1 trillion of assets in the Russian banking sector, Galkin added.
Credit-default swaps on Russian government debt climbed 4 basis points to 247, according to CMA Datavision.
Contracts conceived to protect bondholders against default, credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a company fail to adhere to its debt agreements. An increase indicates deterioration in the perception of credit quality. A basis point on a credit-default swap contract protecting $10 million of debt from default for five years is equivalent to $1,000 a year.
Bank Shares
VTB shares fell 0.7 percent to 5.3 kopeks. The bank's $2 billion of bonds due 2018 fell to 75.4 cents on the dollar, down from 100 cents when the securities were sold in May, prices on Bloomberg show.
The ruble was little changed at 25.0650 per dollar, headed for a 1 percent advance for the week.
Russia's credit outlook was cut to ``stable'' from ``positive'' last week by Standard & Poor's, which said the authorities face pressure to spend the country's oil funds, undermining the nation's credit strength. The New York-based ratings company maintained Russia's rating of BBB+, the third- lowest investment grade ranking.
Crude oil for November delivery fell as much as $3.77, or 3.5 percent, to $104.25 a barrel in electronic trading on the New York Mercantile Exchange today.
The extra yield investors demand to own developing nations' bonds instead of U.S. Treasuries rose 8 basis points to 3.74 percentage points, the highest in a week. The MSCI Emerging Markets Index of stocks dropped 2.1 percent to 820.89, the lowest in a week.
-- With reporting by Emma O'Brien in Moscow. Editor: Gavin Serkin, Bradley Cook
To contact the reporter on this story: Denis Maternovsky in Moscow at dmaternovsky@bloomberg.net
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