Oct. 30 (Bloomberg) -- The Russian central bank’s warning that it will use rate reductions to keep out speculative capital will probably fall victim to high oil prices, undermining the regulator’s efforts to stem ruble gains, economists said.

The bank yesterday cut the refinancing rate half a point to a record low 9.5 percent, partly aimed at “reducing the difference between short-term interest rates on the internal and external markets” to diminish “the attractiveness of short- term investments in Russian assets and stop the accumulation of risk on the stock and currency markets,” it said.

Moscow-based Bank Rossii is struggling to stabilize the ruble and stem an appreciation that threatens to hurt exporters and stall economic recovery in the world’s biggest energy supplier. The bank bought more than $11 billion of currency this month, First Deputy Chairman Alexei Ulyukayev said on Oct. 23. Russia’s currency reserves, the world’s third-biggest stockpile, rose to $429.3 billion this week, the highest this year.

The bank’s warning “will keep investors wary, but in the case of Russia, if oil rests this side of $60 a barrel, which isn’t difficult to envisage, then obviously we will see continued capital inflow,” said Simon Quijano-Evans, head of emerging-markets strategy at Credit Agricole Cheuvreux in Vienna. “It’s the first warning that they don’t want to see massive inflows of short-term portfolio investments occurring.”

Risk Appetite

Urals crude, Russia’s key export, has gained more than 80 percent this year and was trading at $76.76 a barrel today. Oil makes up 30 percent of gross domestic product.

The central bank uses foreign exchange transactions to steer the ruble against a basket of dollars and euros. Prime Minister Vladimir Putin said last month preventing a ruble appreciation remains one of the government’s objectives.

Even so, the ruble is the fifth-best performer against the euro and the dollar since the end of June of the 26 emerging market currencies tracked by Bloomberg. It’s gained 6.7 percent against the dollar and 1.6 percent against the euro in the period.

The Russian currency today gained 0.6 percent to 29.0388 per dollar at 12:30 p.m. in Moscow and strengthened 0.3 percent to 43.0821 against the euro.

“It seems that a new rise in oil prices, which would cause ruble firming both through the influx of ‘hot money’ and through the rise in the foreign trade surplus, would likely translate into deeper rate cuts,” said Tatiana Orlova, a Moscow-based economist with ING Groep NV.

‘Renewed Risk Inclination’

Rising crude prices coupled with “a renewed inclination of investors to take risks” required currency purchases to prevent “a sharp strengthening of the ruble,” the central bank said.

“Clearly the currency is more influenced by things like the oil price and global capital flows and global risk aversion,” said Vladimir Osakovsky an economist at UniCredit Spa in Moscow.

The ruble is appreciating as investor appetite for emerging market assets returns.

“Currency appreciation in emerging markets has been particularly strong this year,” Nouriel Roubini, professor at the Stern Business School at New York University, wrote in an opinion piece focusing on Latin American markets published on Forbes Magazine’s Web site yesterday. “Policy makers need to figure out how to avoid losing international competitiveness.”

Emerging market equity funds drew in a net $2.2 billion in the week ended Oct. 28, EPFR Global said. Gains this week took the total inflows for the year to a record $64 billion, according to estimates by Morgan Stanley.

Carry Trade

Even so, this week’s emerging capital flows suggest investors are less keen to pursue high-yielding assets than they were a week earlier.

Russian equity funds posted net outflows of $43 million in the seven days to Oct. 28 after drawing a record $450 million a week earlier, the most since EPFR began tracking data in the first quarter of 2002.

“The recent bout of risk aversion, if prolonged, will also help calm the Russian central bank’s fears about the speculative inflows build-up,” Goldman Sachs Group Inc. economist Anna Zadornova said in an e-mailed note.

As a carry trade, in which investors borrow funds in a country with low interest rates and invest where rates are higher, the ruble is still attractive, said Peter Westin, chief strategist at Moscow-based brokerage Aton LLC.

Inflation Target

“Russia has one of the highest differences if you look at policy rates related, for example, to the U.S.,” Westin said. “Some central banks have started to introduce capital controls to stem inflows in the light of currency strengthening.” Russia’s central bank and government seem “to be reluctant to impose capital controls again but at the same time we should probably expect to see continued rate cuts in an effort to make inflows less attractive.”

The bank wants to stabilize the currency to allow it to move toward an inflation target by 2011. That goal will be difficult to achieve as long as the economy fails to wean itself off its commodity reliance, economists said. Inflation eased to an annual 10.7 percent in September from 11.6 percent in August. Slowing price growth marks a reversal for Russia, which is haunted by inflation rates in excess of 100 percent after its 1998 default and more than 1,000 percent after it abandoned central planning for market prices in the early 1990s.

While the central bank’s ability to prevent the ruble’s ascent is limited as long as demand for oil mounts, Russian authorities have no choice but to signal their readiness to act, economists said.

Message Needed

“They really needed to convey some verbal messages and be more explicit about this,” said Osakovsky.

President Dmitry Medvedev has called Russia’s oil dependence “humiliating” and has said he envisages a diversified economy in 15 years. Even so, with a global recovery driving up commodity demand, Russia may find it hard to stay committed to its goal of diversification.

“I don’t think they’ll be against a relatively strong ruble,” said Credit Agricole’s Quijano-Evans. “The ruble has actually underperformed all other currencies in the region, except perhaps the Romanian leu now. So there’s potential for the ruble to appreciate from this level, and that’s independent of the central bank’s refinancing rate.”

To contact the reporter on this story: Paul Abelsky in Moscow at pabelsky@bloomberg.net. Alex Nicholson in Moscow at anicholson6@bloomberg.net.

Last Updated: October 30, 2009 05:51 EDT