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Dollar Slide Leads To Currency Conundrum

Published: May 12, 2006 (Issue # 1168)


MOSCOW The Central Bank has a money problem most people would die for: too many dollars.

Its sort of caught between a rock and a hard place, said Peter Westin, chief economist at MDM Bank, referring to the delicate balance Russia faces in investing what this last week became the worlds fourth-largest foreign currency reserves.

Finance Minister Alexei Kudrin said Wednesday that he expected large trading partners such as China and India to include rubles in their own foreign currency reserves, but the more pressing problem for the Finance Ministry is what to do with its own $226 billion in international reserves, most of which is in dollars and euros.

In the last month, the dollar has dropped 2.5 percent against the ruble, and since December the greenback has slid almost 7 percent, representing a drop of several billion dollars in the value of the Russian foreign currency reserves, in ruble terms.

The dollar problem heated up when Swedens central bank announced last month that it would decrease its dollar holdings from 37 percent to 20 percent. The same day as the Swedish announcement, Kudrin told a New York meeting of the International Monetary Fund that the dollar was losing its position as the worlds stable reserve currency, and the greenback immediately weakened in response.

In recent months, the Central Bank has been making available less information about how much of the foreign reserves are in dollars and euros.

Markets become more sensitive when there is a lack of information, said Yevgeny Gavrilenkov, chief economist at Troika Dialog. Eventually everything that they attempt to hide will be known. If there is an unexpected change, the market could be surprised.

In the past, the Central Bank has said it would decrease the dollar ratio of foreign currency reserves to $60 for every 40 euros (from $65 for every 35 euros previously), but there have not been any more announcements along these lines in more than a year, Gavrilenkov said.

Kudrins attack on the dollar in New York was probably politically motivated, Gavrilenkov said, adding that it was a mistake because it had the effect of reducing the value of Russias dollar reserves.

Some experts say the foreign reserve, which has doubled to $226 billion since November 2004, is simply too large: Some of the money could be invested more profitably, or it could be spent on government programs such as education. Russia and other emerging economies are not getting the best deal on investments in their huge currency reserves, and they may be putting too much in the bank, Lawrence Summers, former U.S. Treasury Secretary, said in a March speech at the Reserve Bank of India.

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ALL ABOUT TOWN

Monday, Oct. 20


Amateur pictures from World War I are on display for only one more day at Rosphotos exhibition On Both Sides, chronicling the conflict through the eyes of observers on both sides of the trenches. The price of entrance to the exhibition is 100 rubles ($2.50).



Tuesday, Oct. 21


The Environment, Health and Safety Committee of AmCham convenes this morning at 9 a.m. in the organizations office.


Take the chance to pick the brains of Dmitry V. Krivenok, the deputy director of the Economic Development Agency of the Leningrad region, and Mikhail D. Sergeev, the head of the Investment Projects Department, during the meeting with them this morning hosted by SPIBA. RSVP for the event by emailing office@spiba.ru before Oct. 17 if you wish to attend.


Improve your English at Interactive English, the British Book Centers series of lessons on vocabulary and grammar in an informal atmosphere. Starting at 6 p.m., each month draws attention to different topics in English, with the topic for this months lessons being visual arts.



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