VTB sees tough months ahead for Russian banks

MOSCOW (Reuters) - The head of Russia's number two bank VTB VTBq.L, whose shares have fallen more than half in the past year, sees tough months ahead but thinks the end of the U.S. election season will help improve sentiment for investors.

The United States has heavily criticized Russia over its military action in Georgia, the first time Moscow has used troops outside its borders since the end of the Soviet Union.

"Georgia was very unfortunate for everyone. It does have an impact, but if there was not such a tough financial crisis, then there would not be such a sharp (market) reaction," Andrei Kostin, VTB's chief executive, told the 2008 Reuters Russia Investment Summit.

"The key problem is the global financial crisis. We will get through the conflict (with Georgia and the West) quicker than the financial crisis will go away," he said at the summit, held at Reuters' Moscow offices.

"Then elections in the United States will be over, the rhetoric will calm down, it will become much easier for investors," said Kostin.

He added it was difficult to expect the market to recover in less than six months because of declining commodities prices and instability among Western banks.

The Russian central bank will tighten interest rate policies and liquidity will remain scarce as Western banks compete with previous top borrowers, Russia and China, for capital:

"We are preparing to live in such conditions for a year and a half", Kostin said.

But even if the Russian economy cools down to 4 to 5 percent annual growth from a previous 7 to 9 percent, the macroeconomic situation will remain solid if inflation comes down to single digits from 15 percent now, he added.

The rouble will weaken but that will help exporters.

"I'm touching wood, but for those who have lived through the 1998 crisis, the problems haven't reached their peak ... I don't see global signals that the economy is collapsing if there is no sharp fall in commodities prices".

GEORGIA, MECHEL AND TNK-BP

Investors give three domestic reasons why Russian stock markets have plunged 40 percent since reaching their peak in May: Russia's confrontation with the West after the war in Georgia; Prime Minister Vladimir Putin's attack on coal producer Mechel (MTL.N); and troubles at BP's (BP.L) Russian joint venture TNK-BP (TNBPI.RTS).

"We have a bank in Georgia. By the way, not a single cash machine suffered in (the Georgian town of) Gori ... During the conflict between Russia and Georgia we haven't felt pressure either from the Russian or the Georgian side," said Kostin.

Kostin was at an industry meeting in July when Putin lashed out at Mechel for its pricing policies and promised to send its ill owner, Igor Zyuzin, a doctor -- words which spread panic in markets.

He said sometimes it was unavoidable for authorities to take tough measures to prevent monopolies from fixing prices.

"Mechel hasn't suffered, we are still talking to them because they are our client. Nothing happened to him (Zyuzin), nothing has been taken away from him, he recovered. Don't know who treated him but he looks great today," said Kostin.

As far as TNK-BP is concerned, the conflict has been resolved and should not be a worry to investors, he said.

BP had accused the Russian co-owners of manipulating state agencies to assist their campaign to win control of the joint venture, while the Russians said BP was ignoring their interests.

"50/50 never ends up good. This is a fragile marriage ... I don't think the state had a goal in this game. And if one of the shareholding group was using its knowledge (of administrative resources) it is like one football team is playing against another on home ground and has an advantage," said Kostin.

He also said the political alliance of Putin and his political protege Dmitry Medvedev, who became Russia's president in May, worked well.

"I like it and I don't think there is conflict or contradiction. Everyone was afraid that if you go and see one boss you would have to worry about what the other thinks. I don't see anything like that today," he said.

(Editing by David Holmes)