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30 Jun, 2010 06:49

Euro to remain part of Russia’s reserves

The future of the Euro is increasingly being questioned with budget woes in the EU undermining the currency. But Russia says it will continue to be a key part of its currency reserves.

Russia is bolstering Euro stability. It has assured the EU it will not turn away from the euro as a reserve currency. That means an estimated 200 billion Euro will remain a key part – about 45% – of the world’s third largest reserves. Finance Minister, Alexei Kudrin says it is important to take a long term perspective.

“I believe in the Euro, that it will strengthen. This will require efforts and time. It's important that EU country's governments made necessary decision and now it's important to have political support of the decisions made. In the mid to long term EU will strengthen its financial institutions.”

Developing countries like China – the world's largest reserve holder, Russia and India – are also in line to provide support for the EU currency, which has taken a 20% hit since early in the year as holder have sold off on concerns that the yawning budget deficits could trigger another financial system collapse, and that the necessary budget discipline could push the Eurozone economy back into recession even if the member nations have the political will to carry it out. Aleksey Moiseev, chief economist, at Renaissance Capital says that major policy shifts aren’t in the interest of any major holder of a currency, but that recent suggestions about broadening the composition of Russia’s reserves indicate some concern.

“All the global central banks are obviously limited in their ability to publicly make changes in their policy. So every change Russia will have to do is going to be a very careful one and here I refer to the central banks officials talking about diversification into a more stable currency like the Canadian and Australian dollars."

Another key factor often overlooked in the debate is what Russia could potentially shift its Euro holdings too. Including the Canadian or Australian dollars is not going to be a viable substitute for the European currency, and in both cases they reflect commodity exporters like Russia. The Swiss Franc could be another option but isn’t likely to be as liquid as central bankers would like. More than half the reserves are already in dollars, and the outlook for the US currency is anything but rosy once its budgetary woes are looked at more closely. The Japanese Yen reflects yet another budget disaster area. Russia has been buying gold, but at about $1250 per ounce there are plenty of analysts saying it is in a bubble and could easily slide, and there is the added question about how much gold can be accessed.

Despite the Euro's problems it's value remains around the level at which it was launched in 1999, yet still much higher than it's historical low and, Russia's gesture of support to its European partners may be key to realising future upside.