Russia borrows £141m for its stability plan

The Russian government has surreptitiously borrowed at least $200 million (£141 million) from western commercial banks over the past week to support its financial stabilisation programme, according to bankers.

The short-term bank borrowing appears designed to ease the pressure on the government to borrow through the domestic debt market as it tries to restore confidence in the country's battered financial system.

The Russian finance ministry said yesterday it could not confirm the loans, which follow a $1.25 billion sovereign eurobond issue on June 3rd.

There was particularly low demand for Russian treasury bills at yesterday's regular debt auction, with the average annualised yield climbing to 53 per cent. Yields on Russian domestic debt are among the highest in the world.

Last Thursday, the Russian government received a one-year $200 million rouble-denominated loan from Chase Manhattan, the US bank, at a rate below prevailing Russian Treasury-bill yields. It raised a similar loan from Lehman Brothers, the US investment bank, earlier this spring. Both companies declined to comment on their lending programmes.

Bankers said the International Monetary Fund was aware of the latest loans. But the IMF has been publicly warning the government against excessive foreign borrowings at a time of financial turbulence.

The precise terms of the latest borrowings have not been disclosed but they are understood to include provisions to protect the lenders from currency risk by linking the coupon to the rouble exchange rate.

Several western banks have submitted plans to the Russian government to help it raise additional private capital to cover its short-term financing needs. But government ministers have previously refused to contemplate hedging any such loans to protect lenders from the risk of a rouble devaluation.

Mr Philip Poole, east European economist at ING Barings, the international bank, said: "The Russian government perceives their problem to be a short term issue linked to their high refinancing requirements (in the Treasury-bill market).

"You can safely assume that any foreign bank linked to Russia has proposals to help solve this problem by raising cheaper external loans."

In the past, the Russian government has successfully raised emergency loans from foreign lenders to cover critical financing needs.

Last summer, the government borrowed several hundred million dollars from Mr George Soros, the US financier, to meet a deadline for paying back wages to federal employees. But this six-day loan was repaid in full before the end of the finance ministry's monthly reporting period and was, therefore, not publicly disclosed at the time.

Russian markets were jittery yesterday following a further bout of financial uncertainty in Asia. The RTS index of leading Russian shares closed down 6.2 per cent. Investors were further unnerved by the lack of concrete financial support for Russia following yesterday's meeting of G7 deputy finance ministers in Paris.