Russia blames inflows for overheating stocks

Russian finance minister Alexei Kudrin said on Wednesday he will support only soft measures to curb speculative capital inflows, while blaming them for overheating Russian stocks in addition to the rouble.                                           

"We should be afraid of cheap money -- I mean speculative capital inflows," Kudrin told an investment conference. "We, like many other markets, have received a large volume of short-term speculative money from the world markets. They have arrived, they are among us, and the index is inflated. It is overheated," he said.                                           

Russian stocks have more than doubled in value since the start of 2009, making them among the best performers globally.

The rouble  has rallied since September, threatening to undermine the recovery of Russia's export-oriented economy. The central bank, chaired by a close ally of Kudrin, Sergei Ignatyev, has cut rates to a historic low of 9% in a bid to slow the appreciation of the rouble and support the economy, including a 50 basis point cut on Tuesday.

But despite cuts, Russian rates remain much higher than in many developed nations, offering very attractive yields for carry trade operations against rates of 1% or less in Western economies.                                           

Central bank officials have already promised soft measures to curb speculative inflows to emulate steps already taken by Russia's BRIC peers. Kudrin said Russia would not re-introduce direct capital controls, which it scrapped in 2006.                                           

"They cannot be direct restrictions on capital (flows). I mean they will be soft measures ... These can be reserve requirements, taxation on profits from transactions, not transactions themselves," Kudrin told reporters. 

Changing the flows                                           
Central bank officials have said soft measures could include changes in reserve requirements, caps on banks' open foreign currency positions and also broader regulation on cross-border action such as taxes.                                            

Elina Rybakova from Citibank said all the above measures were possible but the most important would be an introduction of caps on external borrowing by large public sector firms.

State-run firms, such as Gazprom or Rosneft, have borrowed aggressively to fuel growth during the boom years and would severely oppose the measure. Russian banks and firms have to service over $400 billion in foreign debts.                                           

"There is a consensus globally among policymakers that it is legitimate to use capital controls on inflows. They (Russian government) can be successful in changing the composition of inflows," said ybakova. 

No state cash injection                                           
Russian rate cuts have failed so far to translate to the entire banking sector, which is lending at 15 percent or more to industries, fearing another spike in bad loans. Kudrin said Russia's economy still needed stimulus measures via low lending rates instead of state cash injections.                                          

"Our goal should not consist of trying to support demand from the budget ... Demand will appear if there are low lending rates, if a businessman comes and says ''I want to build a factory''. Here is when the demand will appear," Kudrin said.                                           

The central bank's first deputy chairman Alexei Ulyukayev told the same conference more cuts were possible because he saw little risk of a spike in inflation in the first half of 2010.