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Russia Plans to Inject $40 Billion into Banks

Russia is preparing to inject around $40 billion in Tier 1 and Tier 2 capital into domestic banks, with the condition that banks will lend some of the funds to businesses, Finance Minister Alexei Kudrin said on Wednesday.

Speaking in London, Kudrin also said Russia has no intention of introducing capital controls to stop the ruble from depreciating further, adding that this year's inflation could overshoot the target of 13 percent due to the falling currency.

Kudrin said he would welcome the participation of Russia's No. 2 bank VTB in the banking support program, although VTB Chief Executive Andrei Kostin said no decision on injecting capital into the bank has been finalized yet.

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Tier 1 capital is the core measure of a bank's financial strength from a regulatory point of view, such as equity and cash, and Tier 2 capital is regarded as the next most reliable.

"At the moment, we are preparing one more package to the tune of around $40 billion in Tier 1 and Tier 2 capital support," Kudrin told reporters after meeting his British counterpart Alistair Darling. "We are preparing the banking package but with the condition that the funds will be passed onto the real economy," he added in a later comment to reporters.

Moscow has already pledged 950 billion rubles ($26.30 billion) in subordinated loans to key banks last year to help the country's financial sector after the global credit crisis triggered an outflow of foreign capital.

"As we are a shareholder of VTB, we are happy to invite it to enjoy this support through the package that is being prepared," Kudrin said.

A banking source told Reuters earlier on Wednesday that Russia's government has agreed to give state-controlled VTB 200 billion rubles in Tier 1 capital, adding that an official announcement is likely to be made on Thursday.

No Borrowing Plans

Kudrin, asked about Fitch's move on Wednesday to cut Russia's sovereign ratings, said: "We're facing some very difficult challenges.

So certainly the forecast for Russia at the moment is worse now than at the end of 2008." "The conditions of the crisis ...will affect the rating but we will carry on as normal," Kudrin said, adding later that he expected no consequences from the downgrade.

Fitch cut Russia's sovereign rating to 'BBB' and said further cuts were possible due to low commodity prices, high capital outflows, melting reserves and corporate debt problems.

Kudrin said Russia has no plans to introduce capital controls, although the weaker ruble would boost import prices.

"We do not intend to introduce any restrictions on currency operations," he said. "In the next six months the (ruble) devaluation will have an effect on inflation and inflation will rise...Our forecasts are around 13 percent for this year. There are risks that this could go higher," he said.

Kudrin said Russia has made no plans yet to borrow funds in the international market and that its $380 billion-plus foreign reserves would plug the budget deficit.

Recent comments by policymakers have sparked speculation that Russia may be planning to launch a Eurobond to pave the way for issuance by its troubled corporate sector.

Russia, which defaulted on its sovereign debt in 1998, has relatively little outstanding debt. Kudrin said the government was ready to support businesses that create jobs and are key to urban economies.

"Our principles are not sector-specific," he said. "The government is not responsible for private-sector risks, and therefore we will be supporting the sectors in accordance with some principles...(to protect) jobs and businesses that are centered to particular towns or regions."