Source: The Financial Times    Date: April 23, 2010

Prime Minister Vladimir Putin declared on Tuesday that Russia's one-year recession was over. But the optimistic overview failed to mention the country’s main economic worry: the rapidly appreciating ruble. With economic recovery, a higher oil price and speculative capital inflows driving Russian equities up 130 per cent last year, the ruble has appreciated from 33.5 to the dollar a year ago to around 29 to the dollar today. The situation is a welcome change for the Government from the first half of 2009, when the central bank sold billions of dollars to save the plummeting currency.
But while the strong ruble may be a positive signal for investors, it has created its own problems: economists are worried about export competitiveness and, worse, the possibility of a new asset bubble. Both could threaten the meager growth that has been achieved since January, following an 8 per cent fall in economic output in 2009. Mr. Putin, speaking in Parliament, predicted growth would be a modest 4 per cent in 2010.
Since the central bank is targeting inflation, it has to run a flexible foreign exchange policy. “A flexible exchange rate is an integral element of a formal inflation targeting system, as you cannot target both the exchange rate and inflation at the same time,” said Mr. Odd Per Brekk, the International Monetary Fund’s Moscow representative. “From this perspective, the increased flexibility of the ruble that we have seen recently is a welcome move.” But Mr. Bond said there were risks in allowing the currency to appreciate too much. “The risk is that large inflows of hot money would make the ruble too strong and reignite inflationary pressures.”
Russia’s central bank has tempered investor interest by lowering interest rates, cutting the benchmark refinancing rate by a total of 475 basis points in the past year to a record low of 8.25 per cent.