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. Last Updated: 07/27/2016

Kudrin Calls on Central Bank to Set Ruble Free

Russia should free up the ruble to curb inflation pressures, but must also reform its economy further to stay competitive and sustain growth, Finance Minister Alexei Kudrin said in an interview.

Kudrin said the ruble should be allowed to rise to offset the impact of record prices for oil, Russia's main export, while the government needs to build up a stabilization fund set up to insure against any oil price collapse.

"To avoid inflation ... we need to have a more freely floating and more flexible exchange rate," he said in an interview cleared for publication Tuesday.

The Central Bank, which runs a "dirty" ruble float, regularly intervening with dollar buying, has yielded to market pressure by allowing the ruble to appreciate by around 1.5 percent to the dollar in recent weeks.

Kudrin said he hoped neither the ruble nor inflation would significantly overshoot Russia's twin policy targets -- of capping inflation at 10 percent and the ruble's real effective appreciation at 7 percent this year.

Russia has pursued a policy of allowing the ruble to rise slowly to preserve the gain in competitiveness won as a result of the 1998 ruble crash. But that bonus is fading, he warned.

"We need to understand that the strengthening of the ruble which followed the devaluation is gradually reducing the advantage won by Russian industry," Kudrin said.

He also argued that the rainy-day stabilization fund should be built up in line with the economy, with any surplus used to pay foreign debt and not spent on infrastructure projects.

Kudrin has, since his appointment in 2000, boosted growth with low taxes while running budget surpluses to bring the public debt down to around 20 percent of gross domestic product.

Kudrin attacked Prime Minister Mikhail Fradkov in the summer over the slow pace of economic reforms, which he said were vital to defending Russia's competitiveness and growth.

But he said that, with the exception of the gas sector, reforms were now back on track: Power sector deregulation was moving ahead and the banking system strengthening after a bout of instability earlier this year.

New deposit insurance, tighter regulation and the introduction of international accounting standards will benefit Russian banks and make them attractive to foreign investors.

"Foreign confidence in our banking system has risen and ... we can expect a series of major purchases by western banks in the near future," Kudrin said.

He cited state-owned Vneshtorgbank as a target of keen foreign interest. Germany's Deutsche Bank and Italy's Mediobanca have been named in the media as suitors for Russia's No. 2 bank.