Russia wants more gold-here's why

finance.yahoo.com

Russia's central bank has sought to reassure investors by detailing plans to aggressively add to its reserve holdings in a bid to shore up its financial stability.

In a wide-ranging speech at a banking conference on Thursday, Elvira Nabiullina, head of the Central Bank of Russia (CBR), discussed loading up on foreign exchange and gold (Exchange: XAU=) stocks over the next few years, according to Dow Jones. The central bank plans to push its reserve levels from just over $300 billion to $500 billion, the news agency said.

Nabiullina also highlighted that Russia's financial system had adapted to a tough environment and had managed to neutralize financial risks.

But her words faced criticism from some onlookers including Bob Parker, a senior adviser at Credit Suisse.

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"The statement that reserves will be rebuilt is obviously a confidence-building exercise, but lacks credibility since it is unclear how this will be achieved," he told CNBC via email.

Evgeny Koshelev, a Russia-focused economist at Rosbank said the proposed additions were "huge" relative to its available reserves. However, he added that the comments should not be considered as a "binding commitment" from the CBR. 

Russia's reserves have been depleted in recent months as the central bank has opted to sell dollars and other currencies to try to stem the free fall of the Russian ruble. Tough international sanctions over the fighting in Ukraine, plus the dramatic fall in the price of oil, have both made a major dent in the country's economy.

Statistics last month showed that the economy contracted by 1.9 percent in the first quarter of 2015, compared to the same period last year. 

The central bank had $308 billion of reserves in its vaults at the end of April, according to data from the bank. This compares to $428 billion at the same point in 2014. Gold accounts for $48 billion of the current reserve levels, according to the bank, and that level has remained relatively steady during the same period.

Ramping up reserves would help to offset capital outflows from Russia, which also faces falls in disposable income and consumption, with unemployment likely to tick higher. Rosbank's Koshelev added that it could also be used to prevent the negative influence of a stronger ruble (Exchange: RUB=) on industrial production and smooth its fiscal issues.

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Nonetheless, Nabiullina was bullish on Russia's financial system at the conference in St. Petersburg on Thursday, although she conceded there were still hurdles for the economy.
"The risks of financial instability have been swiftly neutralized, devaluation expectations have been reduced, mass deposits outflow has been avoided, growth of market distrust was managed," she said, according to a press release on the website of the International Banking Congress.

"Both financial system and balance of payments of the Russian Federation have adapted already, which cannot be said about the economy on the whole," she added.