Oct. 8 (Bloomberg) -- Russia's stock market collapse is exacerbating a liquidity squeeze and threatening to cut into production and employment, putting the brakes on 10 years of economic growth.

``The sharp contraction of the stock markets has resulted in a major crisis of confidence between banks,'' said Vladimir Osakovsky, chief economist at UniCredit SpA in Moscow. ``That, in turn has reduced the scale of the interbank lending market, which is cutting into available investment resources to the economy.''

Russian President Dmitry Medvedev's pledge yesterday to channel an another 950 billion rubles ($36 billion) of loans for banks failed to forestall a 14 percent plunge in the Micex Index today. The government already promised last month to make more than $150 billion available to banks and companies with loans, cash auctions and tax cuts to preserve the boom a decade after a crash in 1998 wiped out banks and residents' savings.

Micex trading was halted at 11:05 a.m. after it fell for a sixth day to the lowest level in almost 3 1/2 years. The suspension will remain in force until Oct. 10, unless regulators say otherwise. The RTS exchange was suspended indefinitely. Trading was halted 10 times in the past three weeks, including today.

``We should expect a slowdown and the slowdown is already happening,'' said Anton Struchenevsky, an economist at Moscow- based Troika Dialog investment bank. ``Demand is decreasing as consumers are virtually cut off from loans, producers are encountering problems.''

Job, Output Cuts

Russian manufacturing shrank for a second month in September, the first back-to-back contraction since November 1998, as companies cut jobs and growth in new orders slowed, according to VTB Bank Europe's PMI. OAO Magnitogorsk Iron & Steel, the third- largest Russian steel company, said it plans to cut October steel output. It may also fire staff and put others on unpaid leave.

``The situation is similar to 1998, but back then companies used their own resources to pull themselves up'' Struchenevsky said. The connection between the financial industry and real sectors of the economy is stronger now than a decade ago, he said.

The government defaulted on $40 billion of debt and devalued the ruble in August 1998, pushing Russia to the edge of bankruptcy as the oil price dropped to $10 a barrel. Since then, the economy has grown almost 7 percent a year on average, fueled by high oil prices.

Energy, Metals Prices

Now the global financial crisis is pushing down energy and metals prices, Russia's main revenue contributors, and creating a confidence crisis in the banking sector, Deputy Economy Minister Andrei Klepach said yesterday in Moscow.

Russia's Urals blend of crude fell to $79.99 a barrel today, compared with this year's high of $140.80 a barrel on July 3, according to Bloomberg data.

``The financial crisis creates a crisis of trust, when there is money in the banking sector that isn't working. Problems arise with lending to companies and interest rates soar, as we can see,'' Klepach said.

The MosPrime rate, the average interest rate Russian banks charge to lend money to each other overnight, rose to 8.79 percent, its highest level in three weeks.

Economic growth may slow this year more than the government forecast because of the global credit crunch, presidential aide Arkady Dvorkovich said last month. The Economy Ministry is targeting growth of 7.8 percent this year, compared with 8.1 percent in 2007.

Banking Support

The Finance Ministry pledged $44 billion for OAO Sberbank, VTB Group and OAO Gazprombank on Sept. 17 on the understanding that the funds would be used to end a seizure on money markets. Now, the government is seeking to channel $36 billion in subordinate loans to banks from Russia's $562.8 billion of gold and foreign currency reserves and the central bank's own funds.

``To prevent events connected with insufficient stability of certain banks, we are taking extra serious measures,'' Finance Minister Alexei Kudrin said yesterday. ``This greatly improves the state of the banking system for any other operations, supporting the real sector and lending by banks to each other.''

The economy is still set to expand in the fourth quarter, compared with the year-earlier period, bringing gross domestic product growth to 7.3 percent for the year, according to Troika's estimates. Growth will probably slow to 5.5 percent in 2009, Troika's Struchenevsky said.

``The restoration of the financial sector will go hand in hand with the real sector now,'' Struchenevsky said.

To contact the reporter on this story: Maria Levitov in Moscow at mlevitov@bloomberg.net

Last Updated: October 8, 2008 07:25 EDT