Rouble rally on oil poses risk to Russia recovery

MOSCOW (Reuters) - Russia will likely use any oil price correction to allow the rouble to fall sharply as the recent oil rally past $65 a barrel has pushed the currency too high, weakening competitiveness and delaying economic revival.

Should oil prices remain strong, authorities will be forced to curb the appreciation by printing roubles and keeping interest rates high, turning current recession into stagnation at best.

"The current oil price is the least comfortable for Russia because it is too high to carry out a modernization of the economy but too low to sit back and spend," economist Vladimir Mau, who advises the government's anti-crisis commission, said.

Many Soviet Union watchers say the empire collapsed in 1991 because of low oil prices, which also led to a default in 1998, while high prices sent leaders into complacency in the 1970s and during Vladimir Putin's presidency in 2000-2008.

"In previous years our budget expenditure had been unreasonably increased under the influence of high oil prices. I would like to say that this is very dangerous," said Vice Premier Igor Shuvalov, the cabinet's top anti-crisis manager.

Russia, the world's top energy exporter, had based its 2009 budget at $95 per barrel when it saw prices spiking to above $140 per barrel last summer. When they plunged to $33 in December the budget, which relies for half its revenues on energy exports, was rebalanced at a price of $41.

Analysts see the oil price averaging $52.47 in 2009 <O/POLL>. Russia's crude export blend, Urals, climbed above $65 per barrel on Friday, first time since October 2008, pushing the rouble to a four-month high.

NO SUPPORT DURING FALL

Oil is at the heart of the Russian economy, so it comes as no surprise that graphs show a tight correlation between the rouble's exchange rate and the oil price, although intra-day volatility is not as high as in the freely floating commodity currencies such as the Australian dollar.

The oil price fall since last summer prompted Russia to devalue the rouble in November-January by 35 percent versus the dollar/euro basket it uses to guide its forex policies. Since then, the rouble has bounced back from 36 to 31 per dollar.

The 2007-2008 oil rally forced the central bank to buy dollars by printing roubles in mass, and a new oil rally will force the regulator on the defensive again as it would need to keep double digit interest rates to fight inflation and bear political responsibility for slow recovery.

The central bank will therefore try to use any sharp fall in commodity prices to show its commitment to higher volatility by allowing the exchange rate to slide. The success of such a move will determine the timing for transition to inflation targeting, a long-stated goal of the central bank.

"The central bank may prevent the rouble from strengthening through buying foreign currency but if commodity prices fall they will most likely do nothing," said Troika Dialog analyst Anton Tabakh.

MORE THAN JUST DEVALUATION

The central bank claims its latest policy of gradual devaluation was a success because it helped avoid a collapse of the banking system but some businessmen, who had hoped to see the benefits of the 1998 devaluation, say it was a failure.

"They wasted huge resources to support the rouble and did not let it find the bottom and the new 1998 did not happen," said Boris Titov, head of Delovaya Rossiya business lobby. The central bank spent $200 billion during gradual devaluation.

Titov argues the rouble could have fallen to 40 per dollar, spurring industrial growth through imports substitution.

Mau says that unlike in 1998 when Russian firms had significant free capacity, which they could quickly engage, this time the economy needs investment to create new capacity.

"We can no longer hope for a repeat of the 1998 economic miracle," he said, adding that devaluation alone is now not enough to jumpstart industry and structural modernization.

Putin, now Prime Minister, has echoed this call, saying last week business should not pin its hopes on import substitution but strive to produce better and cheaper goods instead.

"Or not produce it all... It makes no sense to substitute imports if it is better to buy somewhere else. If we always try to catch up, we will always lag behind," Putin said.

(Reporting by Gleb Bryanski; Editing by Andy Bruce)