NEW YORK (CNNfn) - While Russian leaders sought to reassure investors that the stock market freefall Thursday had "no economic basis," faith in the country's teetering banking system among the international community began to run cold.
On Thursday, Moody's Investors Service downgraded Russia's country ceiling for foreign currency bonds and notes to B2 from B1.
"It is not clear where the money will come from," said Jonathan Schiffer, senior analyst at Moody's. "We've been watching investor reaction to this. When you put the two together, the situation has worsened considerably since our last move, which was in May. This is simply not a short-term problem."
The chances of a devaluation of the ruble, he added, are now "greater than they were three months ago.
At the same time, Standard & Poor's cut the Russian Federation's long-term foreign currency sovereign and senior unsecured credit ratings to single-B-minus from single-B-plus.
The rating agency also downgraded Russia's short-term foreign currency rating, revising its outlook on Russia's long-term rating to negative.
Marshall Goldman, a professor at Harvard University and an expert on the region, said Russia's already beleaguered economy has been dragged down further by the Asian currency crisis.
"(Russia) has been in a bad state in terms of production, but it was a major exporter of oil, gas and metals. The collapse of the Asian markets and commodities has hurt it badly and affected its trade surplus," Goldman said on "The Moneyline News Hour with Lou Dobbs."
"It had a trading surplus of $20 to $30 billion and industrial production was beginning to pick up, but that's been aborted."
Goldman said the decline of Russia's stock market has dramatically escalated fears: "Even the bottom fishers are worried." (334K WAV) or (334K AIFF)
He said President Clinton, the International Monetary Fund and the Group of Seven industrial nations all will have a long-term role to play in repairing the Russian economy.
"This is a transition that will take decades. There's no quick fix, that's the problem."
A crisis of confidence
Calls for a currency devaluation and dwindling cash reserves sent the Russian stock market into a meltdown Thursday, causing a halt in trading for 35 minutes and prompting the local press to dub the day "Black Thursday."
The Russian Trading System electronic exchange plunged 15 percent in the first 40 minutes of trading before being halted. The index closed Thursday down 7 points at 101.17, off nearly 6.5 percent.
Selling also had been temporarily suspended Tuesday to intervene in an 8 percent slide of Russia's "blue-chip" issues.
"This is Black Thursday for the Russian financial markets," the ORT state-owned television said in its midday bulletin.
Yields on short-dated treasury bills soared to 135 percent to 167 percent as dealers dumped paper to acquire rubles.
The currency, which is not fully convertible abroad, edged down to 6.3250 per dollar Thursday morning from 6.2960 a day earlier.
Problems in the Russian market were at least partially responsible for upsetting Asian and European markets Thursday. And a 93-point drop on Wall Street was attributed largely to worries about Russia.
Soros moves markets
Concerns over currency devaluation and worries the country may default on its loans have plagued the Russian market for weeks.
Those fears hit a fever pitch Thursday after billionaire financier and philanthropist George Soros urged Russian economic leaders to devalue the ruble and introduce a currency pegged to the dollar or euro.
In a letter published in the British newspaper Financial Times, Soros said the exchange rate should be 15 percent to 20 percent below the current rate to reflect the recent oil price collapse.
Soros, an influential voice in the financial markets, hit it big speculating against sterling and other European currencies in 1992.
As of October, Soros Fund Management, the principal investment adviser to the Quantum Group of Funds, had invested more than $2.5 billion in Russian business, making Soros the leading Western investor in that country.
Central Bank deputy chairman Denis Kiselyov, however, dismissed the idea of devaluation, saying exchange policies already in place would bring back stability to the banking system.
"A one-off devaluation of 15 percent to 25 percent would not solve a single one of the problems facing the Russian government," he said.
Moreover, Russia's Prime Minister Sergei Kiriyenko denied the market panic is being driven by economic factors.
"Unfortunately, what's happening on the markets belongs in the realm of psychology," he said. "There are at present no financial grounds for a deterioration in the situation on the markets."
And he urged the government to do everything possible to convince the Duma to pass measures to balance the budget and free up funds for pensions. The Duma is the parliament's Communist-led lower chamber.
Last month, Kiriyenko secured $22.6 billion in credits from the International Monetary Fund and other lenders to help repay existing debts. Russia already has received $4.8 billion from the IMF's $11.2 billion share of the funding package.
Russian President Boris Yeltsin also discussed the country's financial problems with Kiriyenko on Thursday.
According to his spokesman, Yeltsin backed to the government's existing efforts to tackle the crisis and underlined the need to push through measures proposed by the government to protect the ruble.
In what some analysts are calling an 11th hour attempt to avoid devaluation of the ruble, the central bank stepped in Thursday to limit commercial banks' access to international currency and to extend credit to a wider circle of private banks.
The central bank banned commercial banks from buying dollars in excess of clients' orders and in some cases demanded advance ruble payment for purchases of U.S. dollars.
The country's dwindling cash reserves already have left millions of workers without wages and have forced the government to take out international loans to avoid bankruptcy.
The yields have climbed dramatically higher as banks dumped the paper for cash amid a shortage of rubles on the interbank loan market. Some have failed to make repayments.
U.S. President Clinton is scheduled to visit Russia for a summit with Russian President Boris Yeltsin in September.
The Clinton administration says it has confidence in President Yeltsin and the Kiriyenko government, but admits it is concerned about the lack of confidence among international investors.
--from staff and wire reports