ANALYSIS-Russia diplomacy aims to ease economic risks

(For other news from the Reuters Russia Investment Summit, click on

http://www.reuters.com/summit/RussiaInvestment09?PID=500)

* Russia seeking fresh commitments on global crisis policy * Officials feel economy still vulnerable to market swings

* Multilateral pressure could restrain countries' policies * Domestic reforms would take years to have an effect

MOSCOW, Sept 17 - Russia has begun recovering from recession, but its economic diplomacy shows just how vulnerable the country still feels to swings in global financial markets.

The easing of the crisis is prompting many nations to pull back from radical reforms to the world's financial system, and to talk of phasing out expensive economic stimulus steps.

But Russia is mounting a diplomatic drive to prevent such backsliding. Heavily dependent on oil exports, and with an underdeveloped financial sector that can easily be disrupted by shifts in global capital flows, it fears it may not emerge from crisis as smoothly as other countries.

So it is trying to win commitments from other nations to continue their stimulus schemes and stabilise financial markets, before the political will for such steps fades entirely.

"The biggest trouble for us is that we are suffering from economic ups and downs in world markets, exchange rate fluctuations, oil prices," Deputy Finance Minister Dmitry Pankin told Reuters in an interview.

He said obtaining a commitment to "stable, predictable coordination of macroeconomic policy" would be Russia's priority when leaders of the Group of 20 (G20) nations met to discuss the crisis in the U.S. city of Pittsburgh next week.

RECOVERY

After gross domestic product shrank 10.1 percent in the first half of 2009, Russia's output shows signs of rebounding; VTB bank's all industry index exceeded the boom-or-bust mark of 50 in August for the first time in a year.

The rouble has regained over 40 percent of losses suffered against the dollar since July 2008 and a flood of money out of rouble bank deposits and into foreign currencies early this year has reversed.

But at the Reuters Russia Investment Summit in Moscow this week, there was little sense of triumph. Instead, policymakers and corporate executives stressed how vulnerable the economy would remain to volatility in global markets.

"The crisis is not over -- we've just hit bottom. The most difficult part is still ahead," said Finance Minister Alexei Kudrin.

Pavel Gurin, the local head of Austria's Raiffeisenbank, estimated Russian firms had restructured about 70 percent of the debt that needed to be tackled.

But he added that they had only achieved "preliminary restructuring", and that banks remained uncertain about the pace of Russia's economic recovery. "Time will tell how it works out," he said.

RISKS

One of the biggest risks for Russia, officials said, is the possibility of interest rate hikes by the United States and other major countries, probably towards the end of next year. Some analysts think rate hikes might occur much sooner.

Kudrin said that as an emerging market economy, Russia could suffer from capital outflows caused by a general rise in global interest rates. Unlike most other countries, Russia is still cutting interest rates in an effort to bring down corporate financing costs; its latest cut came on Monday.

At a meeting in London this month, G20 finance ministers and central bankers pledged in principle to coordinate economic policies and minimise such shocks.

Speaking at the summit, Arkady Dvorkovich, a key economic adviser to the Kremlin, said Russia would press for a fresh commitment in Pittsburgh.

"We want it to be confirmed once more that we are all continuing anti-crisis policies, not immediately starting to unwind our budget and monetary stimulus."

Pankin said Russia recognised countries would pursue different economic policies, but hoped for consultations that would be helped by the International Monetary Fund (IMF), which has agreed to advise on how to wind down stimulus steps.

"What's important is that there will be an international assessment of policy," he said.

If the United States began unilaterally raising rates, it would face "some kind of international pressure" to ensure that its action fitted in with other countries' actions, Pankin said.

Countries would in effect be required to justify major policy changes to each other in the context of the IMF's advice.

REGULATION

Russia is worried that momentum for global financial reform is fading and it could expose Russia to fresh volatility in its currency and capital markets, especially if oil prices gyrate.

Dvorkovich criticised the G20 for failing to agree on details of reforms to which countries committed in principle at the height of the crisis early this year -- for example, the introduction of a single, global set of accounting standards.

"Now we see that some countries are already relaxing in relation to different elements of these plans and doubting: do we need to do this if everything is already alright?"

On home turf, Kudrin said he would launch a range of fiscal and regulatory reforms over the next year to make Russia less vulnerable to volatility in overseas markets. The reforms would include making public spending more efficient, revitalising privatisation, and cracking down on corruption.

If implemented in the face of opposition from entrenched interests in the government, such steps could eventually produce a more diversified and stable economy. But they would probably take years to have a major impact.

"If the world's stock markets fall by 1, Russia falls by 1.5. It's a high-risk place," said Alexis Rodzianko, a former investment banker who heads private banking at Credit Suisse in Moscow. "I don't see it changing for some years,"