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5 Mar, 2008 12:39

Falling dollar: pros and cons for Russia

The dollar is approaching a three-year low based on expectations of dwindling demand for U.S. labour as the world's largest economy slows down. What does a weaker dollar mean for Russia?

As the dollar slid under 24 roubles at Moscow's exchange kiosks, many average Russians wondered in which currency they should keep their savings. Governments around the world are also diversifying their reserves, and Russia hopes some of them will consider the rouble as an option.

At a Moscow conference on Wednesday, experts and economists said the rouble has a chance of becoming a regional reserve currency. Yaroslav Lissovolik, Chief Economist of Deutsche Bank, shares this view:

“The weight of Russia in the world economy has grown significantly, its contribution to world trade has substantially increased and it has the third-largest stock of Forex reserves in the world. There’s every reason to expect the rouble to become a reserve currency”.

According to Lissovolik, the dollar is unlikely to lose its status as a reserve currency altogether, but it will now have to compete with currencies of developing economies:

“The fall of the dollar will certainly provide more scope for other currencies to take the throne. Surely, one of the main beneficiaries will be the currencies of Asian countries such as Japan, or China – once it liberalises its Forex operations with its currency”.

Russia plans to switch trading in the country's primary oil export, the Urals Blend, from dollars to roubles, which is an important step in raising the demand for the local currency.

With the price of oil topping $US100 a barrel this week, it may seem like good news for Russia as a major oil exporter. But the inflow of petro-dollars would push a free-floating rouble sky high, and that would suffocate Russia’s export industries. This means the rouble is not likely to float freely any time soon, while the sliding dollar continues to spell trouble for the Russian economy.

“Further weakening of the dollar and the Central Bank’s allowing the rouble to appreciate, for example to fight inflation, or for any other reason, means the competitiveness of many Russian exporting segments  will decrease. As for the internal market, definitely, the imports will decrease because more and more of our imports come from Asian countries that have their currency tied to dollar,” believes Evgeny Nadorshin, an economist from Trust Bank.

While some fear an uncontrollably high rouble, others argue it would help control inflation, a major incentive for the government to press forward on a free float.