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Russia shifts to euro as foreign currency reserves soar
June 8, 2003

The inexorable rise in Russia's gold and foreign currency reserves is being accompanied by a steady shift from the dollar to the euro that is likely to continue as Russia draws closer to Europe, Moscow analysts believe.

Russia posted a new record total of 64.9 billion dollars (55.3 billion euros) in gold and foreign currency reserves on June 1, an increase of 17.1 billion dollars since the turn of the year, central bank chairman Sergei Ignatyev told an international banking conference in Saint Petersburg last week.

The rise, yet another boost to Russia's creditworthiness, was particularly sharp in May, representing a record jump of 5.035 billion dollars over the month, the central bank reported.

Russia's reserves have been increasing relentlessly, buoyed by high oil prices, virtually since President Vladimir Putin took office just over three years ago when they stood at barely 11 billion dollars.

"The increase in forex reserves will almost certainly continue for as long as oil prices remain high," said Eric Kraus, an analyst with Sovlink consultants.

The decline in the value of the dollar relative to the euro is encouraging the process, Kraus noted.

The trend will not be unwelcome in Moscow since "it makes European imports more expensive, allowing Russia to continue its policy of import substitution," he added.

Moves by the central bank to buy up dollars in order to curb the appreciation of the ruble have added to the rise in reserves and have been more than matched by purchases of euros.

Deputy Finance Minister Alexei Ulyukayev told Rossia radio last month that the central bank had been amassing euros in its basket of currencies for several months and that the process was likely to continue in order to ensure diversification of holdings in a climate of currency instability.

Ignatyev said Thursday that the proportion of euros in Russia's currency reserves was now more than one quarter, compared with less than 10 percent at the start of 2002, and Putin's chief economic advisor Andrei Illarionov said that the share of euros was set to grow further.

For Kraus, "the shift into the euro is significant because it is likely to be a long-term shift, as Russia moves closer to Europe."

The Russian population is making a similar shift, he noted.

"Russia's foreign trade is 38 percent denominated in euros, and this figure is certainly a first target for the central bank," Kraus said.

While providing welcome insurance against the disastrous 1998 financial crisis, the trend creates dangers of its own, notably inflationary pressures and a surge in the value of the ruble that could hobble the economic growth which Putin has described as a national priority.

By soaking up dollars to keep down the ruble, often printing money to do so, the bank has taken the risk of expanding Russia's monetary base.

According to preliminary figures, Ignatyev said, the money supply (M2 aggregate) increased by 14.3 percent in the first five months of the year, compared with a fall of 5.2 percent in the same period of last year.

A large influx of foreign credits and loans has added to the problem, he said.

The result has been to leave the government with the classic dilemma of having to choose between boosting growth and fighting inflation.

However the problem can also be seen as a consequence of success, Ignatyev noted, the money base growing partly as a result of the acceleration in economic growth since the start of the year and partly due to an increasing predilection among Russian citizens for the euro.

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