CB Says It May Intervene in Euro Rate

The Central Bank said Thursday that it might begin intervening on the ruble-euro market later this year as the euro becomes increasingly important to the country's economy and trade.

Ruble-euro trade accounts for as little as 1 percent of foreign exchange volumes on the Moscow Interbank Currency Exchange, or MICEX, with dollar-ruble trade dominant.

But the bank is raising the euro's profile, increasing the single currency's share in the basket it uses to manage the ruble rate day-to-day. Over half of Russia's foreign trade is with Europe.

The Central Bank intervenes regularly on the ruble-dollar market -- as dealers said it did Thursday -- to smooth out exchange rate fluctuations. But it plans to scale back its presence in the run-up to lifting capital controls in 2007.

"In some ways this will be a substitute for ruble-dollar intervention," Deputy Chairman Konstantin Korishchenko told a panel discussion. He said a decision was in the offing, but that there was no precise timeframe as yet.

There are plans to support euro liquidity, with a new ruble-euro contract for tomorrow settlement planned for early June, as well as a longer trading session of at least 3 1/2 hours, MICEX general director Alexander Potyomkin said.

However, as long as Russia's commodity exports continue to be priced in dollars, the euro will play second fiddle.

"Not only are most of the current account flows dollarized, but also the man on the street thinks in dollars, which is why I don't think we'll see the euro unseat the economic importance of the dollar," said Jens Nystedt, a Deutsche Bank economist in London.

"I still see the ruble-euro as a derivative of the main ruble-U.S. dollar cross, but they are heading in the right direction," he added, saying that the share of euro trade might hit 20 percent in five or six years.

Russia uses a dual currency basket to guide the ruble's intraday nominal exchange rate. This is different from the basket with which it measures its real effective exchange rate. At the moment, the proportions are 20 euro cents and 80 U.S. cents, but Korishchenko reiterated that the bank would soon change this to 30 euro cents. Analysts expect the amount of euros and dollars to become roughly even over time.

The key result of the dual currency basket has been for the ruble-dollar to shoulder more of the volatility stemming from moves on global currency markets.

"Last year the Central Bank would try to maintain the ruble-dollar rate unchanged for a week or two at a time. Then if there was clearly a new trend in the euro-dollar, it would change its [dollar] bid by 10 kopeks," said Troika Dialog chief economist Yevgeny Gavrilenkov. "Now it does this on an everyday basis. It has become more adaptable to global fluctuations."

If the Central Bank did not dip in and out of the market, Russia's booming oil export receipts would drive the ruble higher, killing domestic producers' competitiveness. Despite intervention and the funneling of windfall oil revenues into a budget stabilization fund, the ruble is still appreciating fast -- by 6.6 percent in real, trade-weighted terms in the first four months of this year.

"We would like to try to reduce the level of our involvement in the market, which is hard at the moment, but that is the direction we are trying to move in," Korishchenko added.