View Full Version : Russia Invests In Euro Stability Fund

05-25-2006, 08:56 AM
Russia cools to dollar as it invests stability fund


By Artyom Danielyan
Thursday 25 May 2006, 8:26am EST

ST PETERSBURG, Russia, May 25 (Reuters) - Russia has raised the share of euros in its growing central bank reserves, a top central banker said on Thursday, confirming Moscow's cooling to the dollar as a dependable store of value.

The announcement, by central bank First Deputy Chairman Alexei Ulyukayev, came after Finance Minister Alexei Kudrin said Russia would save its $71.5 billion budget stabilisation fund equally in euros and dollars, with a small share of sterling.

"The share of euros has increased," Ulyukayev told Reuters in Russia's second city St Petersburg, without elaborating.

Euros have accounted for 25-30 percent of the central bank's reserves in the past.

Russia, the world's No.2 oil exporter, has been piling up reserves rapidly as the central bank buys up petrodollars and prints roubles to defend a competitive exchange rate.

Its gold and forex reserves rose to a record $236.7 billion in the week ending May 19, up 36 percent over the year to date.

Kudrin had already questioned the weakening dollar's role as a standalone reserve currency. Late on Wednesday, he said the stabilisation fund would be invested 45 percent each in dollars and euros, and 10 percent in sterling.

Kudrin said the fund -- which gathers windfall tax revenues when the oil price exceeds $27 a barrel and is now held in roubles -- would first be put on deposit at the central bank to earn interest.

"As far as I know, this will not affect the market, I do not think they (the central bank) will need funds from the market," Kudrin told journalists.

Ulyukayev confirmed that the central bank's reserves -- of which the stability fund forms a part -- were sufficiently large to cover the fund's currency allocations.

"The volume of our gold and forex reserves is over three times bigger than the oil fund, so there is no problem," he said.

Under a government order published in April, the central bank and Finance Ministry should sign a bank account agreement by the end of June, and shortly after that swap roubles in the stabilisation fund for hard currency from the forex reserves.

The funds may then be invested in AAA-rated government bonds potentially creating waves on markets, according to analysts.

"At the margin it would make a difference -- it would be a substantial amount of money that goes into U.S. Treasuries and euro govvies," said Zsolt Papp, an analyst at ABN Amro.

Speculation about a shift in reserve composition, mainly from China, Asian economies and major oil exporters, was key in dragging down the greenback in the three years to 2004.

But currency strategists doubt there would be any short-term impact on the dollar from the Russian news.

"Although it may also be a signal of similar moves to come from other reserve managers, it probably suggests that some respite from USD selling may be seen in the short run," Royal Bank of Scotland said in a market commentary.

However, as the oil fund grows, there may be a need to adjust the structure of Russia's reserves.

"This signals that in the mid-term the authorities will gradually increase the share of euros, which will reflect our economic realities because the European Union is our main trading partner," said Yaroslav Lissovolik at Deutsche UFG.

Global central banks which hold more than $4 trillion in forex reserves have become more active currency managers and increasingly play a strong role in the $1.9 trillion-a-day forex market as well as the bond markets.

Oil exporters have received huge petrodollar inflows in the past few years, a major part of which has been ploughed back into risk-free U.S. Treasuries. But they have also made efforts to spread their risks by diversifying into euros and sterling.

Russia's Deputy Prime Minister Alexander Zhukov told Russian agencies the approved investment mechanism would work through this year, but in 2007 Russia may start investing oil fund in riskier assets such as international blue chip stocks.

"In principle we do not reject this idea," Zhukov was quoted by Russian news agencies as saying.