Nov. 25 (Bloomberg) -- Russia’s central bank will keep cutting interest rates as policy makers try to prevent speculative capital from flowing in and destabilizing the currency, Bank Rossii First Deputy Chairman Alexei Ulyukayev said.

Russia needs to keep cutting rates to stem the use of the ruble as a vehicle for the carry trade, and after the economic decline removed inflation risks, Ulyukayev said at a conference in Moscow today organized by the Vedomosti newspaper.

The bank yesterday cut the key refinancing rate to a record low 9 percent in the ninth reduction since it started easing in April as it tries to curb speculative gains in the ruble and ease credit flows. Demand for ruble assets has left Russian stocks overvalued, leading to a threat of overheating, Finance Minister Alexei Kudrin said today. The bank said in October it will also use interest rates to manage the currency.

The ruble was little changed against the dollar to trade at 28.8013 at 1:27 p.m. in Moscow. Against the euro, it slipped 0.4 percent to trade at 43.2988.

Ulyukayev said today the bank will be “more active” in using currency transactions to steer the ruble within a “floating” corridor of 35 to 38 against a target basket of dollars and euros.

The crisis has shown that the economy of the world’s biggest energy exporter is “extremely vulnerable” to external events, Ulyukayev said.

Record Influx

Russian equity funds drew record amounts at the end of October, according to EPFR Global. The ruble is the second-best performer among emerging market currencies after the Chilean peso in the past three months, having gained 8.7 percent in the period, Bloomberg data show.

The ruble gained even after Russia bought foreign currency, raising reserves to $441.7 billion as of Nov. 13, compared with a low of $376.1 billion on March 13, central bank data show.

The government isn’t planning to restrict capital and will target “soft measures” to help stem the ruble’s appreciation, Kudrin said.

The Micex Stock Index of Russia’s 30 most liquid stocks has gained 116 percent this year, making it the world’s best- performing benchmark equity gauge in the period measured in local currencies. The Micex slipped 0.4 percent at 1:30 p.m. today to 1,324.81.

Interest in Russian assets has picked up following this year’s 80 percent rise in the price of Urals crude. Energy products make up about 70 percent of Russia’s export revenue.

‘No Inflationary Risks’

The bank will also continue to cut interest rates as it sees “no inflationary risks” next year with a rate “much lower” than 9 percent, Ulyukayev said. Inflation slowed to an annual 9.7 percent in October, the lowest rate in two years.

Russia, which has the fourth-highest benchmark interest rate in Europe after Ukraine, Iceland and Serbia, is the only member of the four so-called BRIC nations still cutting rates.

“In terms of nominal interest rates Russia is still offering the highest yields in the emerging market space and in an environment where oil prices are remaining relatively well supported we think that the ruble will continue to be seen as an attractive way to position for global recovery,” Manik Narain, an emerging markets strategist at Standard Chartered Bank Plc in London said yesterday.

Capital Requirements

Russia will require its lenders to have bigger capital buffers in future, Kudrin said today. Capital requirements for banks should be raised to 1 billion rubles ($34.7 million), a move the government expects will lead to consolidation in the industry, Kudrin said. The number of banks will probably fall to about 500 from 1,100, he said.

The government is also considering selling its stake in VTB Group OJSC for as much as 300 billion rubles, after acquiring the lender for 180 billion rubles earlier this year as part of its efforts to stabilize the financial industry, Kudrin said. A divestment of the stake may come in two years, adding he expects banks to turn to capital markets to raise funds.

To contact the reporter on this story: Tasneem Brogger in London at tbrogger@bloomberg.net

Last Updated: November 25, 2009 05:46 EST