Russia considers proposal to buy up to $16 bln of yuan for state coffers in 2022

* Practical to buy up to $3-4 bn in yuan a month -paper

* Russian coffers bolstered by oil revenue surge

* Dollar, euro considered 'toxic' after Russian asset freeze

* Alternative reserve currencies are riskier, less liquid

* This content was produced in Russia where the law restricts coverage of Russian military operations in Ukraine

By Darya Korsunskaya and Andrey Ostroukh

MOSCOW, Sept 5 (Reuters) - Russia's government is considering a proposal which says Moscow could buy $3-4 billion worth of Chinese yuan a month to help stem the rouble's rise, but that it does not make sense for the country to accumulate illiquid currencies longer-term.

Flush with oil income, Russia is looking for ways to replenish reserves under a revived budget rule without buying the currencies of 'unfriendly' countries that froze around half its foreign reserves after it sent armed forces into Ukraine.

Currency buying under Russia's budget rule, which diverts excess oil revenues into a rainy-day wealth fund, was suspended in early 2022. A decision on reinstating the budget rule would need the approval of President Vladimir Putin.

Top officials from the government, central bank and major commercial banks held a meeting chaired by Prime Minister Mikhail Mishustin in Moscow on Aug. 30 to discuss the development of the Russian financial system.

But no decision on foreign currency buying was made at that meeting, four sources with knowledge of the matter told Reuters.

The finance ministry and the government did not reply to Reuters requests for comment.

The presentation, seen by Reuters and discussed at the meeting, according to the four sources, said it was feasible for Russia to buy the currencies of 'friendly' countries as a temporary measure to smooth out rouble volatility.

Russia's current account surplus - the difference in value between exports and imports - more than tripled year-on-year in the first seven months of 2022, to a record $166.6 billion, as oil revenues soared while Western sanctions hit imports.

However, Russia is worried that an overly strong rouble will dent revenues from selling commodities abroad for foreign currency, and has been considering buying the currencies of China, India and Turkey to hold in its National Wealth Fund (NWF) as part of its plan to reinstate the budget rule.

But compared to dollars and euros, which Russia has called 'toxic', the currencies of countries that have not imposed sanctions on Russia are less liquid and carry greater economic and political risks.

"Russia is not free to dispose of its reserves in the yuan. Spending them requires separate approval from China. At times of crisis, this approval might be particularly difficult to obtain. Other friendly currencies such as the

rupee are even less liquid," the presentation said.

The proposal suggested it would be practical for Russia to buy up to $16 billion worth of yuan by the end of the year, citing calculations made by the Centre for Macroeconomic Research at Sberbank SBER.MM , Russia's largest lender.

The presentations said that the size of free budget funds could reach $70 billion by year-end, sufficient to buy foreign currency as well as cover the budget deficit and service the national debt.

"From the economic point of view, buying a 'cheap' foreign currency now to resell it in the future is a logical financial strategy. But buying $70 billion by year-end looks extremely ambitious," said Dmitry Polevoy, head of investment at Locko Invest.
Writing by Andrey Ostroukh; Editing by Kevin Liffey and Alexander Smith

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