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UPDATE 2-Russia rouble sets fresh highs, free float eyed

* Rouble highest since Jan vs currency basket

* Supported by strong oil prices, brighter econ prospects

* Analysts say Russia moving towards free float

(Adds Kudrin quotes, oil prices)

By Toni Vorobyova and Denis Pinchuk

MOSCOW/ST PETERSBURG, Oct 20 (Reuters) - Russia’s central bank let the rouble scale fresh highs on Tuesday, shifting its intervention level, in a move that analysts said confirmed the country is gradually moving towards a free floating currency.

The rouble has notched up seven consecutive weeks of gains versus a euro-dollar basket, propelled by strong oil prices, growing investor appetite for high-yielding emerging markets and signs the domestic economy is on its way out of recession.

The central bank has regularly entered the market with foreign currency purchases, but has gradually been shifting its intervention level to allow the appreciation to take place.

The rouble strengthened to 35.69 versus the basket according to Reuters data RUS=MCX, its strongest since January.

Dealers said the central bank had moved its intervention level to 35.70 from 35.75 after purchasing $700 million in the first few minutes of trade on Tuesday.

“I think what we are seeing is an almost complete move to a policy of inflation targeting,” said Vladimir Tikhomirov, economist at Uralsib.

“The central bank now sees its aim as smoothing out fluctuations (of the rouble), rather than fixing the rate at a particular level. The latest comments suggest that on the part of the government such policy has met with support.”

Last week Prime Minister Vladimir Putin said rouble appreciation has advantages as well as disadvantages, striking a more balanced note than a month ago when he said Russia will not allow excessive currency strength. [ID:nLG235893]

The central bank plans to move to a free float and inflation targeting within the next three years, and Putin said reduced currency market interventions would lead to lower inflation.

OIL, ECONOMY

Russia's Urals oils blend rose to one year highs above $75 a barrel URL-E this week.

When crude was last so strong, the rouble traded at around 30.40 against the basket -- some 15 percent stronger than now, potentially leaving scope for further currency appreciation.

Another supporting factor for the rouble is growing confidence the Russian economy is over the worst.

Gross domestic product grew in the third quarter compared to preceding period, Finance Minister Alexei Kudrin said.

“We can talk about an exit from recession,” he told reporters on a visit to St Petersburg on Tuesday. [ID:nLK281969]

In quarterly terms, Russia’s economy contracted in the final three months of 2008 and the first quarter of 2009, marking its first recession in a decade.

In April to June, GDP grew 7.4 percent quarter-on-quarter, but shrank 10.9 percent year-on-year. [ID:nLAG003735]

The rouble hit fresh 2009 highs versus the dollar at 29.16 RUBUTSTN=MCX.

BORROWING

In the long run, the rouble could gain greater stability from Russia’s drive to encourage companies to borrow less abroad, better insulating the economy from any future problems in global financial markets.

Alexei Ulyukayev, first deputy chairman of the central bank, on Monday called on the leadership of state-controlled companies and banks to introduce caps on foreign borrowing. [ID:nLJ28837]

One way would be to tax more of the interest on foreign borrowings, according to Sergei Shvetsov, the head of the central bank’s open market operations department.

“The Bank of Russia’s concerns are linked to the fact that...a positive capital account balance additionally stimulates the appreciation of the rouble, destabilising the currency market,” Maxim Raskosnov, analyst at Renaissance Capital, said in a research note.

“At times of serious economic shocks it (the capital account) has an opposite influence on the market.” (Additional reporting by Yelena Fabrichnaya and Andrei Ostroukh; editing by Patrick Graham)

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