Russia shifts focus from dollar to euro

Central bank deputy chairman Konstantin Korishchenko said that from May, the bank would start managing the rouble’s level against the euro, as well as the US dollar. Initially the euro will comprise about 10--20% of activity, but this will increase to an equal weighting over a short period of time.

Alexei Mossieev, economic analyst at investment bank Renaissance Capital in Moscow, said that as the bank splits its intervention between the two units, there would be an immediate increase in volatility. "Though the central bank wishes to reduce fluctuation, the policy of reducing volatility against the euro will lead to an increase in that against the dollar," he said. This can be viewed as a step towards a free-floating exchange rate he added. Paul Timmons, economist at Russian-owned Moscow Narodny Bank in London, said Russian President Vladimir Putin has targeted a free-float by 2007, and agreed this latest move is a step towards that, although it is limited by the current lack of clarity. "The bank is trying to manage a smooth transition [to a free float], but it is not possible to engineer this," he said. "Either you are present or you are not."

Monica Fan, head of European FX strategy at Royal Bank of Canada in London, said the central bank would need to build up its euro reserves as a result of the change in strategy. RBC estimates that the central bank holds almost $17 billion of reserves in euros of total international reserve assets of $84 billion. As a result, the bank will need to increase its euro reserves by some $25 billion. Timmons said he believes it has already begun this process, though CBR does not break down its overall reserve figure. "Looking at the fluctuations in reserves and moves in euro/dollar, it appears that the central bank may now have $20 billion in euro-denominated reserves." This still points to a need to build reserves by a further $20 billion but it is unclear how quickly, as the bank has not fleshed out the detail of the policy so far, he said.

Analysts agreed that the change in policy would not affect the gradual appreciation of the rouble that is currently occurring as a result of rising oil prices but will lead to more volatility around the upward trend.