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UPDATE 3-Russian rouble eases after c.bank steps up rhetoric

Published 11/19/2009, 11:27 AM
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* Rouble eases to 10-day low vs basket

* Move comes after c.bank flags rate cuts, other measures

* No plans for now to follow Brazil on taxes

(Adds closing prices, comments)

By Yelena Fabrichnaya

MOSCOW, Nov 19 (Reuters) - The Russian rouble eased on Thursday after the central bank stepped up rhetoric against the currency's 2-1/2 month long rally, forecasting more rate cuts and proposing measures to curb speculative capital inflows.

Russia could consider various "soft" measures to curb inflows, which could include changes in reserve requirements, caps on banks' open foreign currency positions and also broader regulation on cross-border action such as taxes, central bank's first deputy chairman Alexei Ulyukayev said on Thursday.

But, when asked by reporters whether Russia could follow in the footsteps of Brazil, Ulyukayev replied:

"It is just an example... There could be such an option, there could be various other options. But there is no such proposal, no plan. It is a basis for discussion."

"There is no deadline, no criteria, no red flags (on the introduction of measures to curb inflows)," he added.

Sergei Shvetsov, a central bank board member, flagged last month an idea of reducing the so-called "tax shield" on foreign loans, bringing the maximum interest rate eligible for the tax shield, which is tax deductible, to 3 percent instead of the current 22 percent.

Officials said the measure, which could encourage firms to borrow at home, was supported by the government but required changes in the tax code and would thus take time to introduce.

Economists said Russia was unlikely to follow Brazil.

"The central bank ... (has) limited scope for other measures to discourage short-term foreign investment flows, given the country's firm political commitment to an open capital account," wrote Goldman Sachs economists in their note.

"We do not expect Russia to introduce anything like Brazil's tax on foreign investment inflows."

Nonetheless, the volume of central bank rhetoric spooked some investors and the rouble eased to 35.32 versus a euro-dollar basket, its weakest since Nov. 9. It then trimmed losses to close at 35.15, 4 kopecks down on the day.

"It is possible that with these verbal interventions the central bank is trying to limit the appreciation of the rouble and this can start to affect the market," said Vladimir Osakovsky, analyst at UniCredit Bank.

For a graphic on the rouble move, please click on http://graphics.thomsonreuters.com/119/RU_CBRFR1109.gif

EMERGING MARKETS PRESSURED

The rouble is just one of the emerging market currencies, which are starting to give monetary officials a headache with their recent rapid appreciation, fuelled by speculative capital.

Emerging stocks dropped by one percent on Thursday and currencies weakened as investors eyed the spread of capital controls in emerging markets.

Brazil, which last month introduced a tax on foreign investment in its bonds and stocks, took another step on Wednesday aimed at containing the appreciation of the real with a tax on certain trades involving American Depositary Receipts issued by Brazilian companies.

Ulyukayev's boss, Sergei Ignatyev, on Wednesday said any Russian measures would be "soft", reiterating his opposition to the re-introduction of capital controls.

The central bank shifts the boundaries of the floating 3-rouble-wide corridor by 5 kopecks for each $700 million in purchases, and Ulyukayev said the corridor is currently located at 35-38 roubles to the basket, confirming dealers' estimates.

In addition to the floating corridor, the central bank keeps the rouble within a firm band of 26-41 roubles to the basket.

Prospects of further interest rate cuts are another factor that could weigh on the rouble, which looks very attractive to investors seeking high yields thanks to Russia's benchmark rate of 9.50 percent compared with rates of 1 percent or less in the rest in most major developed economies.

Ulyukayev said the next cut could come before the end of the month and the issue will be discussed at the central bank's Nov. 24 board meeting.

UniCredit's Osakovsky said there would be scope for at least 100 basis points of further rate cuts by year-end.

-- For a FACTBOX on rouble's moves see (Writing by Toni Vorobyova and Lidia Kelly; Editing by Ruth Pitchford/Ron Askew)

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