(Fixes IDN link to related story in paragraph 5)
* Russian banks have long sought longer-term refinancing
* Analysts say move could badly skew Russian economy
* Moscow keen to cut reliance on Western finance
By Oksana Kobzeva and Jason Bush
MOSCOW, March 26 Russia's central bank is considering three-year refinancing for banks secured by investment projects, its first deputy governor said on Wednesday, amid political pressure to cut borrowing costs and reduce reliance on Western finance.
The move represents a step towards long-term central bank finance for banks similar to measures adopted in the eurozone and is aimed at helping to insulate Russia's banking sector and economy from an anticipated financial squeeze caused by East-West tensions over Ukraine.
But analysts said the move may also harm Russia's long-term economic health by distorting interest rates and investment decisions and further bolstering the already large role of state-backed firms and banks.
"We think that this instrument will encourage the development of investment lending that is now less developed," First Deputy Governor Ksenia Yudayeva said.
Although Russia's central bank has pursued a tight monetary policy as it seeks to crack down on inflation - recently hiking its main lending rate to 7 percent - the bank has been ordered by President Vladimir Putin to lower borrowing costs for so-called "productive enterprises".
Russian banks have been pressing the regulator for longer-term refinancing tools similar to the European Central Bank's long-term refinancing operation (LTRO). At present the Russian central bank provides medium-term refinancing of up to one year.
Yudayeva said that as a first stage the central bank would accept loans that are backed by state guarantees, which implies that large state-backed investment projects would be the principal beneficiaries.
She said the central bank was also looking at ways to enable other loans to qualify as "investment credits" that could be used as collateral against the new long-term financing.
Natalia Orlova, chief economist at Alfa Bank, said the new tool was a response to the difficulties that Russian banks are likely to face in raising international finance because of the Ukraine crisis that has pitted the West against Moscow.
"This is a response to the uncertainty with regard to Russia's access to the global market. For the moment it is very unclear whether global banks will be able to provide additional facilities for Russian banks," she said.
Orlova said it was risky for the central bank to take on this role as it was poorly qualified to assess the quality of investment projects.
"(The move) meets the government's wish to become more independent from global finance, but from the central bank's point of view it definitely requires better knowledge of risks in the real sector," she said.
HSBC's Russia economist Alexander Morozov said the step was acceptable as a short-term emergency measure, but that it could prove damaging for Russia if it became widespread and permanent.
In addition to fuelling inflation by depressing long-term interest rates, the mechanism could lead to investment decisions being made in favour of large state-backed projects, he said.
"That would distort the function of the banking system," said Morozov. "Apparently the central bank will be selecting those investment projects that are run by state-owned banks. Small and medium-sized banks are unlikely to be eligible - this is another risk."
Russian market interest rates fell on Wednesday, with the yield on three-year treasury bonds falling 10 basis points to 8.51.
However, Russian asset prices are strengthening against the backdrop of easing tensions over Ukraine, making any impact from the central bank's remarks difficult to detect. (Editing by Gareth Jones)