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Russia's banking sector creaked back into life this week as it appears the worst of the crisis has passed.

The RTS stock index is already up 31% in two days from a five-year low of 550 hit on October 28. On Thursday, October 30, the RTS had recovered to 760.

Investors were buoyed by the results of US third-quarter GDP figures, which showed the US economy had shrunk by just 0.3%, less than the consensus 0.5% many were expecting. This means the US will almost certainly fall into recession, but suggests the contraction won't be as bad as some feared. In other data, US housing sales were up 5% as some buyers consider prices to have fallen far enough to make buying attractive again.

In Russia, the creeping return of confidence was most apparent in the money markets, where cash is beginning to circulate again as the Russian government's rescue package starts having an effect.

Equity traders report that they can borrow overnight again and the costs are falling from 15% to about 10-12%. Likewise, overnight rates on the interbank market are falling for all Russian institutions. The top 120 banks are able to raise unsecured finance from the central bank at 10% and other entities can borrow at 10% from Rusagribank with equity collateral. "This is hugely supportive especially if the government is buying the equity market and underwriting the collateral," says Julian Rimmer a trader with Uralsib in his blog. "For the first time since August, Russian corporates can raise cash from sources other than the equity market. The bond market, albeit just at the top-end, is starting to shift into first gear."

The price of oil neared $70 in Asian trade on Thursday, October 30 as the dollar retreated from its recent highs and signs of strength in overseas markets tempered some concerns about waning demand. The price will be further supported next year because many Russian oil companies have been forced to slash their capital expenditure programmes and analysts are predicting a 2-5% fall in production in 2009. These falls come on the back of an Opec decision earlier this month to cut production by about 1.5m barrels per day. Analysts believe that the Middle Eastern oil producers need to keep prices at about $70 to balance their own budgets; Russia's budget is also balanced at this level.

Despite these first green shoots of life, the situation remains very fragile and external shocks could still destabilise the emerging equilibrium. If this crisis plays out similar to the aftermath of the 1998 crisis, the RTS will remain stuck at around the 700-800 level for the rest of the year and climb again modestly in the first quarter of next year. But the annual sell-off in the run-up to Easter could be made a lot worse as companies' end-of-year results are digested and there is the possibility of another bout of instability then.

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