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UPDATE 2-IMF urges Russia: defend against excessive inflows

Published 05/11/2010, 09:08 AM
EUR/RUB
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* IMF: Russia should be open to capital controls

* IMF: No need for radical measures to stem rouble rally yet

* Deputy PM: rules for long-term investment should be eased

(Adds quotes, Shuvalov's comments, background)

By Lidia Kelly and Carolyn Cohn

MOSCOW/LONDON, May 11 (Reuters) - Russia should be ready to defend its markets from excessive capital inflows, although for now there is no need to implement any radical measures, the International Monetary Fund said on Tuesday.

Separately, Russia's Deputy Prime Minister Igor Shuvalov said that the government should ease rules for investors willing to keep their money in Russia for more than three years.

The IMF urged Russia in a published report to consider all macroeconomic and prudential measures to prevent surfeit of capital inflows, not excepting capital controls.

"Russia should keep an open mind on capital controls, at least as a temporary measure should large inflows once again become a threat to macroeconomic and financial stability," the IMF said in the Regional Economic Outlook report.

Odd Per Brekk, the IMF's senior Russia representative, softened the tone of the report, however, saying the rouble is broadly in line with macroeconomic fundamentals and for now there is no need to stem its rally with radical policies.

"Absent any further substantial appreciation, we don't see a basis for taking extraordinary steps at this stage to prevent further rouble appreciation," Per Brekk told journalists in Moscow.

The rouble has rallied to its highest level since late 2008 against both the euro and the euro-dollar basket , bolstered by high oil prices, a recovering economy and investor appetite for high-yielding emerging markets.

Per Brekk noted that Russia had capital outflows in the first quarter, and that it had available a whole series of softer measures to prevent excessive inflows, among them changing minimum reserve requirements. [ID:nLDE6310FK]

LESSONS TO LEARN

The pre-crisis pattern of capital inflows offer crucial lessons for Europe's emerging market economies, the IMF said in its report.

"Managing capital inflows remains a crucial challenge across all countries, with policymakers asking how to ensure a healthy level of foreign investment, how to prevent excesses, and how to improve the stability of an increasingly integrated international financial sector," the Fund said.

Russia has been increasingly focusing on implementing measures that would attract long-term funds.

In London on Tuesday, First Deputy Prime Minister Igor Shuvalov said that Russia should ease rules this year and create more privileged status for serious investors.

"The longer-period loan they provide, the smaller reserve they use," Shuvalov told reporters. "If it's short money, then the reserves will be higher, the final interest rate will be high, you won't be able to play with just exchange rate and inflation."

Capital inflows, along with high commodity prices, stood behind the rouble's rise during Russia's pre-crisis boom years. But once the crisis hit the country, capital inflows reversed, fleeing Russia instantaneously and resulting in the rouble's managed but rapid depreciation.

However, Russia's officials have ruled out a return to strict capital controls and the country has already taken some steps to curb speculative inflows, including lowering interest rates and allowing greater flexibility in the rouble's rate.

"Capital controls could be part of the short-term response," Per Brekk said. "But one should be realistic about the effectiveness of capital controls over time." (Writing by Lidia Kelly; editing by Dmitry Sergeyev and Tony Austin)

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