Russia uses budget funds to help bank liquidity

By Simon Shuster and Yelena Fabrichnaya

MOSCOW (Reuters) - Russia's Finance Ministry on Wednesday set a minimum annual interest rate of 7.25 percent for the first of several budget fund auctions designed to help commercial banks ride out the global liquidity crisis.

The auction of up to 300 billion roubles ($12.79 billion) will take place on April 17, the ministry said in a statement. Funds will be deposited with the banks from April 18 and must be returned by May 14.

Russian banks, which have borrowed heavily abroad to finance growth, have so far escaped the severe liquidity problems that hit the banking sector in neighbouring Kazakhstan last year.

However, with international capital markets still jammed by the debt crisis that erupted last August, Russian banks are facing slower growth in most segments and have put pressure on the government to provide urgent help.

Vasily Fyodorov, vice-president of top-20 Russian lender Nomos Bank, said the budget deposits would protect Russian banks from ebbing global liquidity.

"We will take part in the auctions, but mainly just to get an idea of how this instrument will work going forward. It is an exciting one and promises to play a significant role in the future," Fyodorov told Reuters.

With large corporate tax payments and foreign debt redemptions squeezing liquidity on two fronts in March and April, the state is taking action.

But analysts warned the backlash would be a dramatic spike in inflation, even if the instrument does stave off any remaining tightness in money supply.