UPDATE 1-Russia mulls barring firms from using foreign-owned banks

Tue Jun 24, 2014 9:12am EDT

* Considers restricting big firms to using Russian banks

* Seen as unlikely because of damage to investment climate

* Move is reaction to threat of western sanctions (Changes sourcing, adds comments)

By Oksana Kobzeva and Jason Bush

MOSCOW, June 24 (Reuters) - Russia is considering banning state companies and other strategically important firms from holding accounts at foreign-owned banks, a governmental source familiar with the proposals told Reuters on Tuesday.

"Such an idea is lingering, but there is no decision about it as yet," the source said.

Analysts doubted that the plan would be adopted, saying it would be highly damaging for Russia's investment climate and would face opposition from major companies.

Earlier on Tuesday Russia's Kommersant newspaper reported that the Finance Ministry had prepared legal amendments that would bar state companies, as well as strategically important private firms.

The paper cited an unnamed source familiar with the plans as saying that the amendments included changes to Russia's laws on banks, administrative violations and money laundering.

The Finance Ministry declined to comment.

Under the proposals, all state-owned companies would be allowed to have accounts only at Russian state-owned banks, or at privately-owned Russian banks with capital of at least 16.5 billion roubles ($483 million), Kommersant reported.

The restrictions would also apply to privately-owned companies that were significant for Russia's defence or security, as defined by an existing law on foreign investment in strategic companies.

This meant the restrictions would apply, for example, to large commodity producers, telecoms companies and retail chains, Kommersant said.

Maxim Osadchy, banking analyst at BKF Bank in Moscow, said that if adopted the move would exacerbate Russian companies' restricted access to western capital resulting from sanctions over Ukraine.

"An iron financial curtain was raised by the West, so to speak, and now an iron curtain for financial flows is also being raised by the Russian side," he said.

"Two such curtains could turn the once powerful river of foreign investment into Russia into a feeble brook, or stop it altogether."

Osadchy said it is common practice for companies that receive loans from a foreign bank also to have deposits with the creditor bank, which provides lenders with some security. If foreign banks are restricted in taking deposits, it could also reduce their appetite to lend to Russian companies.

"They will naturally reduce the supply of credit resources because of the risks. It will be a blow to Russian borrowers," he said.

He doubted, however, that the proposals would be adopted, because of opposition from major Russian companies whose international operations could be impeded by the inability to open accounts at foreign banks.

"Definitely this would decrease the attractiveness for foreign investors in the banking sector, because a large part of Russian companies are deemed strategic and this is increasingly so," said Vladimir Osakovsky, chief Russia economist at Bank of America Merrill Lynch.

"Let's see if it will be approved or not. I think it is unlikely because it is a negative move from the investment climate perspective."

Russia has been mulling steps to reduce its vulnerability to Western sanctions over the Ukraine crisis, which has raised fears that Western countries could freeze Russian assets abroad.

However, the likelihood of tough western sanctions against Russia appeared to be receding on Tuesday, following a rebel ceasefire in eastern Ukraine and a request by Russia's President Vladimir Putin to parliament to revoke its authorisation for military intervention in the country. (Reporting by Oxana Kobzeva and Jason Bush, additional reporting by Darya Korsunskaya and Megan Davies; editing by Lidia Kelly/Ruth Pitchford)

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