Russian Reserves Reach Two-Year High as Euro Surges

Russia’s international reserves rose to the highest in two years last week as the strengthening euro bolstered the world’s third-largest foreign currency stockpile.

Reserves jumped $6.7 billion to $501.1 billion, Russia’s central bank said in a statement on its web site today. It’s the first time the reserves have broken $500 billion since mid-October 2008, a month after the collapse of U.S. brokerage Lehman Brothers Holdings Inc. triggered the global credit crisis.

“This is only because the euro moved so much,” Alexey Moiseev, chief economist and head of research at VTB Capital, the investment banking arm of Russia’s second-largest bank, said by phone in Moscow today. “Russia will give up the 500 level as soon as the euro starts to pare back its gains.”

The euro climbed 1.1 percent against the dollar last week, its fourth straight week of gains, as investors shunned U.S. assets amid concern the economic recovery will slow and the Federal Reserve may ease monetary policy further. Euros account for 41 percent of Russia’s reserves, while dollars constitute 47 percent, British pounds 10 percent, Japanese yen 2 percent, along with a small amount of Swiss francs, First Deputy Chairman Alexei Ulyukayev said in June.

Russia is concerned about the “increased volatility” of reserve currencies as it could be a sign of increasing instability in the global financial system, Finance Minister Alexei Kudrin said in Moscow today. The U.S. is using monetary policy as a way of “solving structural problems” in its economy, he said.

‘Gradual Devaluation’

The U.S. benchmark interest rate is a record low 0.25 percent, spurring investors to shun the currency and seek out higher yielding assets elsewhere.

Russia reduced its reserves from a record $598.1 billion at the beginning of August 2008 to $376.1 billion in March 2009, the lowest since at least January 2008. The nation’s central bank buys and sells foreign currency to manage the ruble and prevent swings that hurt exporters and used the reserves to engineer a “gradual devaluation” of the currency between November 2008 and the end of January 2009, as the global economic crisis and credit crunch hit.

Bank Rossii hasn’t intervened to steer the ruble since mid-September so currency management is not a factor currently influencing reserves, Moiseev said.

Given the weakening dollar, Russia is “considering many options” for diversifying the stockpile, Bank Rossii’s Ulyukayev told reporters in Moscow yesterday. There are many currencies “with good potential” that are not fully convertible, which takes them out of consideration for reserves, Ulyukayev said. Russia wants a varied reserves make-up of liquid currencies because it decreases risk, he added.

Only China and Japan have larger reserves than Russia, data compiled by Bloomberg show.

To contact the reporters on this story: Emma O’Brien in Moscow at eobrien6@bloomberg.net;

To contact the editor responsible for this story: Gavin Serkin at gserkin@bloomberg.net

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