Russian firms back govt 'dictatorship' over banks

MOSCOW Nov 11 (Reuters) - Russia should take a tough line with banks to ensure a government rescue package restarts credit flows and reaches the real economy, the head of the country's trade and industry chamber told the president on Tuesday. Yevgeny Primakov, who led Russia's government as it emerged from its previous financial crisis 10 years ago, said a "state dictatorship" was required to ensure tens of billions of dollars flowed through banks to their intended recipients in industry.

"Our biggest concern is that the thrombosis of credit lines and the rise in banks' rates is leading to falling production," said Primakov, chairman of the Russian Chamber of Commerce and Trade, which unites and represents various Russian businesses.

In an address to President Dmitry Medvedev at a Kremlin meeting attended by the heads of regional chambers, he said the rescue package should be channelled to the real economy.

"This can only be done through a tough state dictatorship over the banks," Primakov said.

Russia has pledged $200 billion in state aid to help its economy ride out the global financial crisis, but its leaders have shown growing concern in the last few days that some of this money has stalled in the country's banking system.

Russia recorded its biggest ever monthly net capital flight in October - $50 billion - at least some of which occurred as a result of banks plugging holes caused by the financial crisis.

Medvedev, addressing the meeting, warned that government money was intended to kick-start industrial production and should be used to achieve this goal.

"Most of the liquidity has arrived," he said, "but the companies have not received it."

"The liquidity is not supplied to allow banks to buy foreign currency or reserve the money in foreign banks."

Medvedev's comments echoed a warning by his predecessor and Prime Minister Vladimir Putin on Monday, who said money movements out of the country would be strictly monitored. [ID:nLA553850]

Banking shares fell on Tuesday in line with the wider market. Sberbank SBER03.MM, Russia's largest lender, was down 11.9 percent and No. 2 bank VTB (VTBR.MM) fell 10.2 percent against a 12.6 percent decline on the MICEX exchange .

HIGH RATES

Russia's gold and foreign exchange reserves, $484.6 billion as of Oct. 31, should theoretically be sufficient to weather the global financial crisis and a 60 percent drop in the price of oil, Russia's main export commodity, from peaks reached in July.

But the government admits the credit crunch could strangle the economy before the new upward trend takes off.

Primakov said high lending rates were also a problem for the country's real economy.

"With the rates topping 10-15 percent, there is no point developing business," he said, quoting a letter by provincial businessmen sent to Medvedev.

Medvedev said high credit rates were not only dictated by banks, but were also a consequence of high inflation. Consumer prices in Russia are expected officially to rise 13 percent in 2008 and analysts say inflation could be even higher.

A decade of economic boom has helped the Kremlin to maintain social stability in Russia after years of post-Soviet political turmoil. Maintaining this stability is a key aim of the government's rescue package.

Medvedev said preserving and expanding the flourishing middle class remained a top government priority: "The middle class is the basis for Russia's further development.". (Editing by Robin Paxton and David Cowell)