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Russia seeks US$140b reserves boost

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Russia is seeking to boost central bank reserves by about US$140 billion over the next few years to the level before it annexed Ukraine's Crimea, provoking international sanctions.

[MOSCOW] Russia is seeking to boost central bank reserves by about US$140 billion over the next few years to the level before it annexed Ukraine's Crimea, provoking international sanctions.

Reserves should reach a "comfortable" level of about US$500 billion within the next few years from about US$360 billion now, Bank of Russia Governor Elvira Nabiullina told the International Banking Congress in St Petersburg on Thursday.

"In optimal conditions, reserves should be enough to cover considerable capital outflows for two to three years," she said. "The increase in reserves should be gradual and solely in a way that doesn't contradict monetary policy goals, particularly reducing inflation to 4 per cent in the medium term."

The reserves fell by about a quarter in 2014 as Russia propped up the ruble, which lost almost half its value against the dollar in the face of declining oil prices and US and European Union sanctions after Crimea was annexed in March last year. Sanctions were expanded last July as the US and the EU accused Russia of aiding separatists in eastern Ukraine with troops and weapons, a charge President Vladimir Putin rejects.

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The Bank of Russia started easing monetary policy this year as the economy enters its first recession in six years. The regulator lowered its key interest rate three times, cutting borrowing costs by 4.5 percentage points to 12.5 per cent, following an emergency increase to 17 per cent in December aimed at halting the ruble's slide.

Russia has adequate reserves by international measures and building them up doesn't amount to support for the ruble, Ms Nabiullina said. Russia isn't abandoning the currency's free float, though "more frequent interventions on the currency market" are possible during the "initial phase" of the regime the bank adopted in November.

It's an "ambitious" goal for the central bank with a free-floating exchange rate, Natalia Orlova, chief economist at Alfa Bank in Moscow, said by phone. "Either they have very optimistic expectations or they are ready for a weakening of the ruble rate."

The ruble has rebounded 11 per cent this year, the best performer among more than 170 currencies tracked by Bloomberg, following an increase in oil prices. It weakened 1.3 per cent to 55.0098 against the dollar at 12.17 pm in Moscow.

Ms Nabiullina's announcement is meant to show "that things are fine in the economy, but also that they have a mechanism to keep the ruble weakening if required," Vladimir Miklashevsky, a strategist at Danske Bank A/S in Helsinki, said in e-mailed comments.

The central bank announced in mid-May that it plans to buy as much as US$200 million daily to replenish its reserves after last year's plunge.

While the threat of financial instability has been largely neutralized, faster interest-rate reductions involve risks and curbing inflation expectations remains the bank's priority, Ms Nabiullina said.

Russia spent 509 billion rubles ($9.3 billion) in total to rescue banks and the regulator withdrew 145 licenses in the past two and a half years, Ms Nabiullina said. The economic slump is no reason to ease bank oversight, while Russia's banking industry is showing stability and its profit may be 100 billion rubles in 2015. There may be "moderate" growth in banking indicators this year and a turnaround in the credit market in the second half, she said.

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