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13 Oct, 2009 17:57

Dollar slide has limited upside for Russia

It's been the worst month for the U.S. dollar in 20 years, as it continues a 6 month decline, with forex players, including central banks increasingly looking elsewhere. But there is little upside for Russia.

Be careful what you wish for. Governments in emerging markets have been crying out for an alternative to the dollar, and in recent months they've added fewer dollars to their foreign currency reserves.

This autumn the concerns which many have had about the U.S. currency, have become increasingly real, as it continued to weaken. Recent weeks have seen the greenback slide below the 30 Roubles to the dollar mark, despite the Central Bank of Russia’s attempts to limit the appreciation of the Russian currency. Elsewhere its facing $1.50 to the Euro and long term lows against the Australian and Canadian dollars. Long term highs in crude prices and a series of all time highs for gold also reflect dollar weakness and attempts to hedge against further weakness as much as inherent demand.

But for emerging economies there is a clear downside. The weakening dollar not only leaves the U.S. consumer – driver of much of the worlds growth, and by far the worlds largest consumer – getting less bang for their buck when they buy imported goods, but it also means that U.S. products are more competitive. With the U.S. dollar index down from nearly 90 in March this year, to below 75 this week, it means that they could be as much as 20% more competitive, with some analysts tipping the index could head below its all time low of 70 in coming months.

Ruben Vardanyan, CEO of Troika Dialog says the slide of the dollar has positives and negatives.

“For some countries it’s a very big benefit. For countries selling oil its not very good because the main revenue comes from the dollar. It’s a very complicated matter, its not black and white.”

The downside has become increasingly obvious to central banks in recent weeks, with Asia banks notable in buying dollars in an attempt to support it – but also keep their currencies competitive. Japan and China, along with other Asian nations, have long made considerable effort to keep their currencies cheap in comparison with the dollar, to keep their export dependent economies growing.

Russia too has been buying the dollar. It isn’t dependent on exporting to the US, but although oil prices are rising as the dollar slides, a rising Rouble could see Russian producers facing more competitive imports, creating a brake on economic growth as the nation pulls out of recession.

Herman Gref, CEO of Sberbank, says balancing competing priorities is complex, with the move by the Central Bank of Russia towards inflation targeting likely to make currency volatility more pronounced. Gref adds that Russia’s largest bank isn’t looking to abandon the dollar.

“We are a conservative organization – we don't look for minor gains and don't shift from one currency to another because of currency fluctuations. As you know, the Central Bank is promising to switch to a policy of inflation targeting. In this case the currency will become even more volatile. I would warn all those who like to hunt for pips on the currency markets to do that.”

A weak dollar could also push up the cost of borrowing for Russian companies and destabilize the international financial system if it leads to major doubts about which currency to use in contracts and for pricing commodities.

Ruben Vardanyan sees little upside for the Rouble in the ailing U.S. currency. He adds that it isn’t likely to help the Rouble become more of a reserve currency in its own right, noting that this would require a longer term consistent economic performance. 

“The dollar can become very weak but the Rouble will not become a reserve currency anyway. If the Russian economy will not be stable and grow.”

About the only major upside for Russia from the greenback slide is the nominal rise of oil prices – which moved above $74 dollars a barrel on Tuesday – and the movement back towards the Russian currency after Russians sold it off en masse during the managed Rouble devaluation last winter.

As Russian consumers found last year, companies will need to covert the dollars they earn back into diminishing amounts of Roubles. But with the US dollar likely to remain weak until there are clear signs of an American economic rebound, and signals of a tighter monetary or budgetary policy, the implications of what effect it has on Russia are increasingly being watched.