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Kevin Kerr: Dollar''s demise practically insures gold''s rise

Section: Daily Dispatches

By Artyom Danielyan
Thursday, May 25, 2006

ST. PETERSBURG -- Russia has raised the share of euros in its
growing central bank reserves, a top central banker said on
Thursday, confirming Moscow's cooling to the dollar as a dependable
store of value.

The announcement, made by central bank First Deputy Chairman Alexei
Ulyukayev, came after Finance Minister Alexei Kudrin said Russia
would save its $71.5 billion budget stabilisation fund equally in
euros and dollars, with a small share of sterling.

"The share of euros has increased," Ulyukayev told Reuters in
Russia's second city, St. Petersburg, without elaborating.

Euros have accounted for 25-30 percent of the central bank's
reserves in the past.

Russia, the world's No.2 oil exporter, has been piling up reserves
rapidly as the central bank buys up petrodollars and prints roubles
to defend a competitive exchange rate.

Its gold and forex reserves rose to a record $236.7 billion in the
week ending May 19, up 36 percent over the year to date.

Kudrin had already questioned the weakening dollar's role as a
standalone reserve currency. Late on Wednesday, he said the
stabilisation fund would be invested 45 percent each in dollars and
euros, and 10 percent in sterling.

Kudrin said the fund -- which gathers windfall tax revenues when the
oil price exceeds $27 a barrel and is now held in roubles -- would
first be put on deposit at the central bank to earn interest.

"As far as I know, this will not affect the market, I do not think
they (the central bank) will need funds from the market," Kudrin
told journalists.

Ulyukayev confirmed that the central bank's reserves -- of which the
stability fund forms a part -- were sufficiently large to cover the
fund's currency allocations.

"The volume of our gold and forex reserves is over three times
bigger than the oil fund, so there is no problem," he said.

Under a government order published in April, the central bank and
Finance Ministry should sign a bank account agreement by the end of
June, and shortly after that swap roubles in the stabilisation fund
for hard currency from the forex reserves.

The funds may then be invested in AAA-rated government bonds
potentially creating waves on markets, according to analysts.

"At the margin it would make a difference -- it would be a
substantial amount of money that goes into U.S. Treasuries and euro
govvies," said Zsolt Papp, an analyst at ABN Amro.

Speculation about a shift in reserve composition, mainly from China,
Asian economies, and major oil exporters, was key in dragging down
the greenback in the three years to 2004.

But currency strategists doubt there would be any short-term impact
on the dollar from the Russian news.

"Although it may also be a signal of similar moves to come from
other reserve managers, it probably suggests that some respite from
U.S. dollar selling may be seen in the short run," Royal Bank of
Scotland said in a market commentary.

However, as the oil fund grows, there may be a need to adjust the
structure of Russia's reserves.

"This signals that in the mid-term the authorities will gradually
increase the share of euros, which will reflect our economic
realities because the European Union is our main trading partner,"
said Yaroslav Lissovolik at Deutsche UFG.

Global central banks, which hold more than $4 trillion in forex
reserves, have become more active currency managers and increasingly
play a strong role in the $1.9 trillion-a-day forex market as well
as the bond markets.

Oil exporters have received huge petrodollar inflows in the past few
years, a major part of which has been ploughed back into risk-free
U.S. Treasuries. But they have also made efforts to spread their
risks by diversifying into euros and sterling.

Russia's Deputy Prime Minister Alexander Zhukov told Russian
agencies that the approved investment mechanism would work through
this year, but in 2007 Russia may start investing oil funds in
riskier assets such as international blue-chip stocks.

"In principle we do not reject this idea," Zhukov was quoted by
Russian news agencies as saying.


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