Iceland, with IMF deal in works, turns to Russia

REYKJAVIK (Reuters) - Icelandic officials are in Moscow on Tuesday for talks on an emergency loan that could be worth billions of euros, the country's latest attempt to raise cash to help save its economy from collapse.

Iceland has tapped the International Monetary Fund for financing to help ease the crisis and some ministers have raised the possibility of membership of the European Union, long resisted by its fishing sector, to safeguard the economy.

An official from Iceland's central bank said a delegation from the bank and government left for Russia on Monday to begin talks on the emergency loan, a move that has raised questions about Russia's motives and what price Moscow might extract.

Iceland's once-flourishing economy has come close to collapse as the global financial crisis froze credit markets. Policy-makers are struggling to get the banking system functioning again.

The state has been forced to take over three of the country's largest banks, shut down stock trading and abandon attempts to defend its free-falling currency.

The stock exchange, which was closed on Monday, was due to reopen on Tuesday.

Late on Monday, the central bank said it was working with institutions to get foreign currency activity on track and that former number two bank Landsbanki had been able to conduct some currency deals during the day.

Iceland's crown currency was essentially untradeable on Monday and its value was impossible to calculate.

ICELAND NEEDS SUPPORT

Analysts said Iceland could not fix its problems on its own.

"Bank nationalization, currency pegs, currency de-pegging and stock market suspension are not initiatives that will heal the wounds that have been suffered over the last month," wrote research house 4Cast in a note.

The next step should be to get cash and line up support, 4Cast wrote.

Beat Siegenthaler, chief strategist emerging markets at TD Securities in London, agreed. "It is clear that Iceland will need substantial foreign aid in order to prevent further major damage to the economy," he said.

On Monday, an IMF official who asked not to be identified, told Reuters the fund's executive board discussed Iceland's official request for finance at the weekend but that no amount had been agreed.

An Icelandic government spokeswoman said she could not confirm that an official request had been made.

There were also signs the government may be softening its anti-EU stance, with two ministers saying Iceland should look at joining the bloc to protect the economy.

Icelanders have become increasingly keen to join the euro currency as the economic situation has eroded.

However, to gain access to the single European currency, a country must first join the EU -- a step many politicians feared would lead to concessions that would hurt the fishing industry.

The speed with which Iceland's economy has crumbled has been breathtaking. The tiny country over the past decade had built a financial sector that brought unprecedented prosperity to its 300,000 people and won favor with foreign savers and investors.

(Additional reporting by Adam Cox and Anna Ringstrom in Stockholm, Lesley Wroughton in Washington; Editing by Elizabeth Piper)