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Thread: Russia Ends De Facto Dollar Peg And Moves To Align Rouble With Euro

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    Russia Ends De Facto Dollar Peg And Moves To Align Rouble With Euro

    Russia ends de facto dollar peg and moves to align rouble with euro

    The Financial Times
    February 5 2005
    By Steve Johnson

    In accordance with Title 17 U.S.C. Section 107, this material is distributed without profit to those who have expressed a prior interest in receiving the included information for research and educational purposes.

    Russia said yesterday it had abandoned efforts to tie the rouble's movement closely to the dollar and switched to shadowing both the euro and the US currency.

    The move heightened expectations that other countries operating de facto dollar pegs, such as China, could follow suit.

    With 81 per cent of Russia's oil exports currently sold to Europe, the move also provoked fresh speculation that Russia could decide to denominate its oil in euros. Russia is the world's second-largest oil exporter, behind Saudi Arabia.

    "Russia has talked about the idea of pricing its oil in euros. If it is starting to put more weight on the euro in terms of its forex regime and reserves, then that speculation will be re-ignited," said Ian Stannard, currency strategist at BNP Paribas.

    Russia had announced its intention to introduce a basket arrangement last April but did not set a firm date for the change. The Bank of Russia, the central bank, has been building its euro reserves in readiness, with some 30 per cent of its reserves now estimated to be in euros, against just 5 per cent in 2000. Traders said it appeared Russia had begun to loosen its peg to the dollar in October, when the rouble began to strengthen against the dollar while the US currency fell strongly against the euro.

    The bank yesterday indicated that its efforts to keep the rouble closely pegged to the dollar had caused the Russian currency to suffer against the strengthening euro, rendering the old policy "inexpedient."

    The rouble has fallen by 30 per cent against the euro since January 2002, fuelling inflation in a country that conducts about 65 per cent of its trade with the eurozone.

    "The rouble's performance has been highly correlated with the dollar. Now it will be more aligned with the euro," said Paul Timmons, economist at Moscow Narodny Bank.

    He added that the new policy would help Russia move towards a free float of its currency in 2006, a target set by President Vladimir Putin.

    This euro weighting will be increased in future to "a level that corresponds to [the] tasks of the exchange rate policy", leading some to conclude that the euro could ultimately account for 65 per cent of the basket, prompting a further re-balancing of Moscow's $128bn (‚99bn, £68bn) of gold and forex reserves.

    Julia Tsepliaeva of ING Financial Markets said that with inflation currently running at 11.7 per cent, Russia had been forced to stem rouble weakness in order to meet its 2005 inflation target of 8.5 per cent.

    Moscow's move illustrates the growing global importance of the euro at a time when a number of central banks have been shifting reserves out of the dollar into the shared European currency.

    "It is symptomatic of a global trend and reflects the growing international role of the euro," said Ralph Sueppel, head of emerging Europe strategy at Merrill Lynch.

    "It is beginning to take its place in portfolios."

    The Bank of Russia said it has been using a basket consisting of 0.1 euro and 0.9 dollars to target exchange rate policy since February 1. With the euro trading near $1.30, this currently gives the euro a 13 per cent weighting in the basket.
    No One Knows Everything. Only Together May We Find The Truth JG


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    No One Knows Everything. Only Together May We Find The Truth JG


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