* Russia bans fruit, veg, meat imports from EU, U.S., others
* Moscow's main two share indexes extend sharp falls
* Benchmark govt bond yields hit highest since 2009
(Adds details, comment, updates prices)
By Jason Bush and Polina Devitt
MOSCOW, Aug 7 Retail and banking shares led
broad declines on Russian markets on Thursday after Moscow
responded to Western sanctions with food import bans and chose
to plug a budget gap by diverting private pension fund
Prime Minister Dmitry Medvedev said Russia would ban fruit,
vegetables, meat, fish, milk and dairy imports from the United
States, the European Union, Australia, Canada and Norway for one
year starting immediately.
The move was aimed a punishing countries that imposed
sanctions on Moscow for annexing Crimea and supporting rebels in
But it looked likely to add to a raft of problems already
besetting the Russian economy, and Moscow's main two share
indexes extended Wednesday's sharp falls while benchmark
government bond yields hit their highest since 2009.
Despite an economic slowdown expected by analysts in a
Reuters poll to produce growth of just 0.3 percent this year,
the central bank has already hiked interest rates three times in
recent months in an attempt to rein in high inflation.
Concerns the ban on Western foods would put further upward
pressure on domestic prices were reflected in the share price of
leading Russian retailer Magnit, which fell 4.4
percent. Analysts warned that surging inflation could also
undermine the basis of the central bank's monetary strategy.
"The ban on food imports ... calls for revisiting the
short-term and medium-term inflation outlook, which has
deteriorated significantly in recent months," Alfa Bank said in
a note to clients.
It hiked its inflation prediction for 2015 to 8 percent -
well above the central bank's target.
Medvedev said the food ban "wasn't an easy decision to
take", but added that Russia would be able to meet its needs
from local production except for milk and beef.
Liza Ermolenko, emerging market economist at Capital
Economics in London, described the food ban as "nationalistic
policymaking, away from markets and an open economy", adding:
"The way things are going now it looks unlikely that the Russian
economy is going to grow at all over the next few months."
The negative impact of higher inflation on consumer spending
power also ate in to the share prices of financial stocks. They
were already facing headwinds from Tuesday's government approval
of a plan to use employees' pension fund contributions to plug
budget holes for a second year running.
Alexander Baranov, deputy director at Pallada Asset
Management, said that was the main factor weighing on markets.
Leading banks Sberbank and VTB were down
sharply, falling 2.9 percent and 3.9 percent respectively. The
banks were hurt by falling bond prices, which will impact their
financial results, Baranov said.
Yields on Russia's ten-year treasury bonds reached 9.87
percent, the highest since late 2009 and a rise of 150 basis
points since July.
That was a direct consequence of the government's decision
on pensions, which meant the financial system would be short of
funds needed to buy bond issues next year, said Baranov.
At 1320 GMT, the dollar-denominated RTS index was
down 1.8 percent at 1,140 points, while its rouble-based peer
MICEX traded 1.4 percent lower at 1,316 points.
This follows steep falls on Wednesday, when the RTS fell 2.6
percent and MICEX fell 1.7 percent, amid pessimism over the
escalating East-West standoff on Ukraine, where fighting between
government forces and separatist rebels is continuing.
"The domestic share market remains under selling pressure
against the background of strengthening fears of investors
regarding a new turn in geopolitical tensions," Promsyvazbank
analyst Oleg Shagov said in a note.
The combination of a struggling economy, fiscal juggling and
trade restrictions also risks generating fallout among Russian
"We may see a total change in the priorities of the central
bank and the loss of (its) independence," ING economist Dmitry
A deputy economy minister, Sergei Belyakov, was sacked on
Wednesday for criticising the pension funds decision on Facebook
as "stupidity" and "damaging for the economy".
The rouble was initially little changed on Thursday, but
subsequently joined the broad Russian sell-off as the day
The rouble was 0.5 pct weaker against the dollar at 36.36
and down 0.3 percent against the euro
at 48.62. It fell 0.4 percent to 41.87 against
the dollar-euro basket, its weakest level for three
Rossiysky Capital analyst Anastasia Sosnova said in a
morning note that the increase in inflation expectations from
the import ban would put additional pressure on the rouble.
ING's Polevoy said that food import bans could add around
1.5 percentage points to the annual inflation rate.
The central bank aims to reduce inflation to 4.5 percent in
(Editing by Janet McBride and John Stonestreet)