June 6, 2009 / 10:19 AM / 10 years ago

UPDATE 3-Russia says yuan could be reserve currency in decade

* Russia’s Kudrin says yuan may be reserve currency

* IMF says SDRs as reserve currency have advantages

* Moscow pushes greater role for Russian rouble

(Recasts, add quotes, details, background)

By Toni Vorobyova and Guy Faulconbridge

ST PETERSBURG, Russia, June 6 (Reuters) - China’s yuan could become a world reserve currency in the next decade, Russia’s finance minister said on Saturday, as Moscow seeks to whittle away at the U.S. dollar’s dominance.

China has slowly started to use its economic might to carve out a larger role for the yuan CNY=CFXS, which is still not fully convertible.

“I think the shortest route would be if China liberalised its economy and allowed the convertibility of the yuan,” said Finance Minister Alexei Kudrin, a close ally of Prime Minister Vladimir Putin.

“This could take 10 years but after that the yuan would be in demand and it is the shortest route to the creation of a new world reserve currency and I think China needs to think about this,” Kudrin said at a panel discussion at the St Petersburg International Economic Forum.

China and Russia, the world’s No. 1 and No. 3 biggest holders of foreign exchange reserves, have expressed unease about the volatility of the U.S. dollar and called for discussions on ways to create rival reserve currencies.

The European Union’s economic chief Joaquin Almunia, who took part in the same panel session as Kudrin, played down the prospects of the dollar being supplanted from its leading position in the world economy any time soon.

“The dollar is obviously the main currency in our global economy as a reserve currency and this position of the dollar will not be changed in the short-term by any kind of political decision or political will,” he told reporters.

“These are decisions adopted by the market and I think the markets in these kinds of issues evolve gradually.”

IMF CURRENCY

The Kremlin has said the leaders of Brazil, Russia, India and China, known by the BRIC acronym, may discuss the idea of a supranational currency when they meet in the Russian city of Yekaterinburg on June 16. [ID:nL21010092]

Moscow and Beijing have pushed the idea of using Special Drawing Rights (SDR), the International Monetary Fund’s unit of account, as a way to reduce reliance on the greenback.

The proposal for using SDRs as a supranational currency got a warmer reception from the IMF.

“The creation of the SDR as a true reserve currency in its own right would be a big step that could solve some problems and may in the long run be viewed as the most desirable and effective outcome,” IMF First Deputy Managing Director John Lipsky told reporters. [ID:nL6219355]

“But it involves some big steps in terms of governance, controls, etc,” he said.

Other forum participants said the idea was worth looking at.

“The dollar is like the English language today, which is the lingua franca, and SDRs are Esperanto. We have to see how we can get this Esperanto more widespread,” said Helmut Reisen head of reseach of the OECD Development Centre.

Russian officials also pushed Russia's long standing idea to turn the rouble RUB= into a regional reserve currency.

“We believe it (the rouble) will slowly emerge as a reserve currency but I will not give you any indication over time,” said Kremlin’s top economic aide Arkady Dvorkovich.

Kudrin said major emerging markets, many of which have gained from the massive injection of liquidity by the Federal Reserve and other central banks, could suffer when the same banks have to deal with a backlash of inflation.

“If the liquidity can perhaps support the demand which is being supplied by the Federal Reserve and other central banks, then as soon as there are signs of inflation then this liquidity will leave (the) world financial system and our emerging markets will again lose capital,” Kudrin said.

Kudrin has served as finance minister since 2000 and is credited with ensuring Russia built enough reserves during the boom years of Putin’s presidency to brave the economic crisis, which has hammered Russia’s $1.7 trillion economy. (Editing by Keiron Henderson)

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