NEW YORK (MarketWatch) -- The Russian government moved to stem the country's financial crisis Thursday by keeping the two main stock exchanges closed for a second day, vowing to inject $20 billion into the markets and announcing a cut in oil taxes.
Stock trading remained closed Thursday on Russia's two main exchanges, the RTS and the Micex, giving the government time to come up with market stabilization measures after Russian stocks went into a freefall earlier this week.
The RTS and Micex exchanges said that they will reopen for trading on Friday.
The dollar-denominated RTS stock index has tumbled about 54% this year, making it one of the worst-performing markets in the world.
Sharp drops in Russian share prices have sparked fears of a replay of the country's 1998 financial crisis. Investor confidence has been hurt by the global credit crisis, the recent sharp decline in oil prices and the fallout from Russia's war with Georgia last month.
Government measures
Russian President Dmitry Medvedev said Thursday that 500 billion rubles, or $20 billion, will be injected into the financial markets, according to media reports.
"The market should be given all the necessary support," Medvedev was quoted as saying by the ITAR-TASS.
Video: Financial Turmoil Roils Russia
Vladimir Kvint, an expert on emerging markets, discusses the escalating financial crisis in Russia, the outlook for its battered stock market and the impact of political risk on investor sentiment. (Sept. 18)
"The government did absolutely the right thing -- they stepped in when the market failed," said James Fenkner, principal and portfolio manager of Red Star Asset Management, a hedge fund that invests primarily in Russian assets.
"I would expect the Russian market to be extremely volatile over the next few days as participants see whether or not the government support works," Fenkner said in emailed comments.
Although Russia has solid economic fundamentals -- including strong economic growth rate and the world's third largest foreign exchange reserves -- its markets have been hit by a liquidity squeeze as external shocks coincided with an escalation of domestic risks. That combination of factors has prompted investors to pull billions of dollars out of Russia in recent weeks, with analysts estimating the capital outflows at about $20 billion.
The central bank said Thursday that Russia's foreign exchange reserves fell by $13.3 billion to stand at $560.3 billion during the week ending Sept. 12. Since Aug. 1, when they stood at $597.3 billion, Russia's reserves have declined by $37 billion.
"The only thing to me that Russia has going for it are the foreign exchange reserves they have," said Reiner Triltsch, head of international equities at Federated Investors. "That's the only thing. Investors' confidence has been totally sapped by Mr. Putin," he said, referring to Russian Prime Minister Vladimir Putin.
Putin, who was Russia's president for eight years until this May, has pursued a very aggressive foreign policy and expanded the government's control of strategic economic sectors, raising concerns about state interference in the economy. Those concerns were underscored in July when Putin's criticism of steel company Mechel (MTL: 24.03, +2.87, +13.6%) precipitated a sell-off in its shares and wiped out billions of dollars of its market capitalization.'The only thing to me that Russia has going for it are the foreign exchange reserves they have. That's the only thing. Investors' confidence has been totally sapped by Mr. Putin.'
— Reiner Triltsch, Federated Investors
"Serious institutional investors do not like this [turmoil]," Triltsch said. "I'd bet that most of the long only investors have probably exited Russia and sold their positions to hedge-fund type entities."
Triltsch said that his firm has reduced its exposure to Russia to the bare minimum.
As for the government's market stabilization measures, Triltsch said that "they sound good on the surface, but I'm not sure they can necessarily achieve something."
Thursday's government measures came after the finance ministry said yesterday that it will loan the country's three largest banks up to 1.3 trillion rubles, or $44 billion. In addition, Russia slashed banks' reserve requirements by 4% Wednesday to boost liquidity. Read more.
"Geopolitical tensions have increased risk premiums, declining oil prices have reduced the attractiveness of Russian assets and the 'meltdown' on Wall Street is encouraging market participants to dump any kind of risk nowadays, including Russian assets," said Lars Rasmussen, an analyst at Danske Bank.
Several minor and medium-sized Russian banks face an especially difficult environment, and there will likely be consolidation in the Russian banking sector as large state-owned banks, such as VTB, Sberbank and Gazprombank, absorb smaller players, Rasmussen said in a research note.
"This is not 1998 all over again, even though equity market performance resembles what happened 10 years ago," Rasmussen said. "We do not expect the panic in financial markets to bring down Russia's real economy although most Russian economic observers will probably have to adjust their expectations for it significantly lower going forward." 
Polya Lesova is a New York-based reporter for MarketWatch.
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