Russian central bank to keep buying gold, moving away from risky paper assets

The Russian central bank will continue to buy gold as it seeks to diversify its foreign reserves away from paper assets it views as risky, First Deputy Chairman Alexei Ulyukayev said today.
The Bank of Russia has built up the world's fourth-largest foreign reserves, worth $530 billion, by buying oil export dollars to keep the rouble competitive. The hoard includes two rainy-day budget funds that guard against fiscal shocks.
The bank has also been a bullion buyer and the share of gold in its reserves is approaching a medium-term target of 10 percent, raising questions over whether it would keep buying gold.
Ulyukayev, speaking during the World Economic Forum, said the central bank would continue to buy gold, but gave no indication on whether there would be any change in the share of its reserves it allocates to the precious metal.
"We are buying metal and will continue to pursue this course," Ulyukayev told reporters in Davos. "This is a course of asset diversification in a situation when investing in securities or deposits remains risky."
Russia's central bank is undertaking a shift from a managed float of the rouble to inflation targeting, which is leading it to scale back its accumulation of forex via market interventions as it fine-tunes interest rate policy.
But the government wants to bolster its ability to withstand economic shocks, and will transfer $30 billion in surplus revenues from last year to its fiscal Reserve Fund, meaning that the central bank's reserves will grow.
Ulyukayev oversees the Bank of Russia's asset management and is viewed as a contender to take the helm when Chairman Sergei Ignatyev retires in June. He dodged a question when asked whether President Vladimir Putin had chosen him for the job.
"It's good that he's made up his mind -- better an end to the horror than horror without end," joked Ulyukayev, a liberal economist who has published his own book of poetry.
The Kremlin dismissed reports that Putin had already made up his mind. "The process continues, but not as actively as some are writing -- there's still plenty of time," Dmitry Peskov told Reuters. A candidate should be chosen in March.
Ulyukayev, 56, has weighed into an intensifying debate over the "currency wars" that have broken out as advanced economies pursuing aggressive monetary stimulus in a bid to grow their way out of a debt trap.
He recently accused Japan of "protectionist monetary policy" and, detailing the current composition of the central bank's foreign exchange reserves, he made no mention of the yen.
According to a breakdown given a year ago, the central bank held 1.6 percent of its forex reserves in yen. It was not immediately clear whether or when that position had been sold.
Russian bankers in Davos said, meanwhile, that it would make sense for the central bank to expand its allocation to gold.
Another source familiar with the central bank's thinking said, however, that there were no plans to change the 10 percent share. Russia's central bank bought 80 tonnes of gold last year, and it plans to buy a similar amount in 2013.
At the end of last year, the central bank held nearly 950 tonnes of gold, worth some $51 billion, its figures show.
It owned 400 tonnes of gold at end of 2006 and the price of the yellow metal has since rallied by $1,000 as the regulator bought up around half of Russia's gold mining output.
Giving a breakdown of the currency portion of Russia's foreign reserves, Ulyukayev said the U.S. dollar accounted for 46 percent and the euro 40.5 percent.
Sterling has a 9 percent share, the Canadian dollar 3 percent, and the Australian dollar, added to Russia's reserves last year, at 2 percent.
Separately, he said that inflation could exceed 7 percent in February but should start to ease from March onward. Consumer inflation reached 6.6 percent in 2012.
He saw no grounds for further monetary stimulus but left open the direction of the central bank's next interest-rate move. "It could be one way or the other," he told reporters.