Global crises still to play out in Russia: Kudrin

By Darya Korsunskaya

WASHINGTON (Reuters) - The global credit crisis and volatility across developed financial markets could yet hurt Russia and hinder long-term investment, Finance Minister Alexei Kudrin said late on Saturday.

"It is still early to say that we have moved through the risk zone; inflows and outflows could still increase," Kudrin told reporters after taking part in an annual meeting of the International Monetary Fund and the World Bank.

"The period of influence on Russia from certain crises in the West has still not passed," he said. "It was recognized that today it is still to early to talk about stability on Western currency and stock markets."

A global credit squeeze sparked by concerns over how to value high-risk U.S. mortgage-backed securities has made it harder for borrowers in Russia and neighboring Kazakhstan to access debt markets and drained financial sector liquidity.

Kudrin, who oversees Russia's fiscal and monetary policy, said Russia was in a strong position to ride out external shocks thanks to its vast gold and foreign exchange reserves, which rose to a record $434 billion on October 12.

SPECULATIVE CAPITAL

But he said high inflation and the appreciation of the rouble made Russia attractive for "speculative capital".

Russia attracted heavy capital inflows in the first half of 2007, but they went sharply into reverse as the credit crunch hit in August.

Inflows resumed after the U.S. Federal Reserve cut interest rates on September 18, as portfolio investors increased their exposure to emerging markets. Many analysts say the rouble is undervalued and should be allowed to rise to contain inflation.

"In conditions of high inflation and the appreciation of the rouble we remain attractive for speculative capital," Kudrin said.

"Accordingly we are unable to fully hold the money supply and this influences inflation, and this in turn influences the volatility of capital flows and liquidity."

Russia's central bank runs a managed float of the rouble and typically buys oil export dollars on the currency market to eliminate appreciation pressures on the Russian currency that might undermine the country's economic competitiveness.

Dollar-buying intervention totaled around $10 billion in the first 12 days of October, the head of the central bank, Sergei Ignatyev, said at the beginning of this week.

That intervention boosts the money supply, as do measures undertaken by the central bank to keep the Russian banking system liquid during the credit squeeze, such as daily repo auctions whose volumes have exceeded $10 billion at times.

Kudrin said the measures to boost liquidity were fuelling inflation.