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. Last Updated: 07/27/2016

Population Urged to Retain Dollars

MTA currency exchange board at Belorussky Station showing the euro has overtaken the dollar for the first time since February 2000.
The government warned dollar-hoarding Russians not to rush exchange points Tuesday as the dollar dipped lower than the euro for the first time in 2 1/2 years.

"In any situation, the main thing is to avoid abrupt movements," Alexei Volin, the Cabinet's deputy chief of staff, was quoted by RIA Novosti as saying. "Mass dumping of the dollar would be the greatest mistake now."

The Central Bank set Wednesday's official ruble rates at 31.48 to the dollar and 31.66 to the euro, making the European currency more expensive than the greenback for the first time since February 2000.

With an estimated $50 billion to $70 billion under their mattresses, Russians are believed to hold more cash dollars than anyone but Americans and tend to react quickly to any news that could affect the exchange rate.

Oleg Kuznetsov, head analyst at the Moscow Interbank Currency Exchange, said euro buying has increased gradually in recent weeks as the dollar has drifted down and the vacation season heats up. "Nonetheless, the dollar market remains about 20 times larger than the euro market," he said.

Economists say a weaker dollar could actually help the economy. "Overall, it could be positive for Russia," said Peter Westin, economist at investment bank Aton. "Russia's competitiveness could grow by 10 percent to 13 percent."

Since the economy is so dollarized, the weakening of the dollar has pulled the ruble down with it. As a result, not only has real ruble appreciation against the dollar slowed, but the ruble has depreciated against other foreign currencies. "This puts a lid on euro-zone imports," said Niclas Sundstrom, chief strategist for Citigroup in London, adding that exports to the single-currency region may even increase.

The euro zone accounts for about 37 percent of total imports to Russia. About 60 percent of the nation's exports are dollar-denominated natural resources, but they are priced in the global market and thus do not react strongly to exchange rate movements, Sundstrom said.

Finance Minister Alexei Kudrin said Tuesday that although dollar-euro parity could cost the country an additional $400 million in debt payments this year, no changes to the budget would be required. Much of the government's roughly $150 billion debt is denominated in euros, including more than half of the $35 billion Paris Club debt and $2 billion in Eurobonds, Westin said.

"The government is well hedged against any increase in debt payments," Westin said. The price of gold, which makes up about 10 percent of the Central Bank's $42 billion in international reserves, has increased by about 13 percent this year, and exports have grown as well, which could provide an additional $170 million to the budget, he said.

Additionally, the government collects export duties denominated in euros, which could generate another $200 million, Westin said.

Kudrin said the Central Bank is unlikely to change its policy in accumulating reserves. "The growth of the euro cannot be called a constant and stable tendency, as it is related not to a significant strengthening of the European economy, but to some emerging signs of distrust in the American [economy]," news agencies quoted him as saying.