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9 Jul, 2008 04:06

Medvedev calls for the rouble to become reserve currency

Russian President Dmitry Medvedev says the rouble should become a reserve currency. But inflation and dependency on other world currencies is holding this ambition back.

Six member countries of the G8 are home to major reserve currencies.  Russia is NOT one of them

In 2007, 63.3% of reserves were kept in U.S. dollars, 26.5% in euros, 4.7% in British pounds, and 2.9% in Japanese yen.

Russia has been touting the rouble as a potential reserve currency for quite some time.
Now turbulence on global financial markets could serve as a means of making this a reality. But there a number of issues holding it back.  One of them – inflation.

Irina Lebedeva, Economist at Deutsche Bank, Moscow says the outlook is for continued high levels of inflation

“To become an international reserve currency, one of the main goals is to reduce inflation.  And given high commodity prices, we don't see significant reduction in inflation in the next several years.  For the next 5 years, it's expected to remain high.”

The Finance Ministry sets targets in the hope of curbing inflation. Russia also manages a float of its national currency to keep it stable against the dollar/euro basket.

Evgeny Nadorshin, Chief Economist at Trust Bank, Moscow says more needs to happen before the Rouble could become a reserve currency.

“Being linked to the world currency basket, it's not an independent currency.  It's a currency which's behavior is completely determined by external factors.  If the rouble moves from that state, there is a good chance it could become a reserve currency.”

Russia’s trading partners, in particular CIS countries, would be the most likely home for rouble reserves.  Some investors and government officials are banking on the currency having a higher profile in future.