The abolition of capital controls, a milestone of Putin’s second
presidential term, would mark a step back toward the Soviet economy that
was mostly sealed off from international markets.
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President Vladimir Putin’s government scrapped capital controls in 2006, becoming the only one of the biggest emerging economies to allow unrestricted flows of money across borders. If the Ukrainian conflict worsens, tripwires may be set off in case the ruble weakens 15 percent or the country’s international reserves fall about $100 billion, according to Russian economic institutes that advise the government.
“Rejecting the free flow of capital is more of a political decision than one for the central bank,” said Mikhail Khromov, a senior researcher at Moscow-based Gaidar Institute. “It may be Russia’s answer to Western sanctions.”
The abolition of capital controls, a milestone of Putin’s second presidential term, would mark a step back toward the Soviet economy that was mostly sealed off from international markets. With economic ties being gradually severed again, Russia may put up defenses of its own to halt investor flight and shield reserves, the world’s fifth-biggest.
The European Union followed the U.S. in putting more pressure on Russia’s financial system in an effort to force the Kremlin to end support for separatists in eastern Ukraine. The bloc said yesterday that it will prohibit Russian state-owned lenders including OAO Sberbank and VTB Bank from selling shares or bonds in the EU.
‘Soft Measures’
“The central bank will try to use market instruments,” Anton Tabakh, a senior economist at the Energy and Finance Institute in Moscow, said by phone. “But if there’s a sharp and systemic ruble depreciation, capital outflow and pressure on reserves, then the central bank may impose soft measures to control capital.”In 2006, the central bank made the ruble fully convertible by scrapping currency controls and easing restrictions on investors. Before then, the regulator required the use of special accounts and depositing a collateral to transfer funds.
Russia’s reserves, which peaked at $598 billion six years ago, have since declined by $126 billion and are near the lowest level since 2010. The ruble, which has lost 7.9 percent against the dollar this year, is among the 10 worst-performing currencies in the world, according to data compiled by Bloomberg.
‘Serious Depreciation’
“A serious depreciation of the ruble, for example by 15 percent from the current level, may be a reason for the central bank to impose some capital restrictions,” Ilya Prilepskiy, an analyst at the Economic Expert Group in Moscow, said by phone.Russia’s central bank, led by Chairman Elvira Nabiullina, has so far tried to combat market turmoil with three interest-rate increases, and last week pointed to “geopolitical factors” for tighter monetary conditions since March.
Russia refrained from introducing controls during the 2008-2009 financial crisis and later refrained from the measure to keep out speculative capital. With the stalemate over Ukraine showing little sign of easing, investors are heading for the exit in droves.
At $48.8 billion, Russian capital outflows in the first quarter were the largest since $132.1 billion had left the country in the last three months of 2008 after the collapse of Lehman Brothers Holdings Inc. and a five-day war with Georgia.
Outflows from Russian assets jumped to $74.6 billion in the first half, compared with $61 billion in the whole of last year, central bank data show. The regulator estimates capital outflows won’t exceed $90 billion this year.
‘Headache Now’
“The headache now is about what will happen with reserves in the future,” said Sergei Pukhov, a senior analyst at the Development Center of the Higher School of Economics. “If sanctions continue, the level of reserves may in the course of 2015-2016 reach a critical level equal to six months of imports of goods and services, or about $200 billion,” a figure that excludes two sovereign wealth funds.Restrictions on money flows is for now an “unlikely scenario,” according to Yaroslav Lissovolik, Moscow-based head of research at Deutsche Bank AG.
“Even capital outflow forecast at $100 billion this year isn’t enough to put the issue of capital control on the agenda,” he said.
When the U.S. and its allies first started to impose individual sanctions in March, the Russian government held no discussions on imposing currency controls, Deputy Finance Minister Alexey Moiseev said at the time.
Crisis Deepens
Since then, tensions have escalated, with the authorities in Kiev pressing an offensive against separatists in the east of the country. After a Malaysian passenger jet was downed over eastern Ukraine on July 17, the U.S. and the EU ramped up sanctions against Russia, limiting access for banks to capital financing.If Putin reverses course, he’ll be joining other developing economies such as China, where capital controls are used to limit access to local securities. Countries from Argentina to Ukraine have imposed restrictions to safeguard reserves and halt a slide in their currencies.
The central bank still doesn’t see any reasons for introducing control over cross-border capital flows, according to its e-mailed statement in response to questions from Bloomberg News.
‘Step Backward’
A Chinese model with a fixed exchange rate and capital controls would be a “step backward” for Russia, Nabiullina said in an interview in June 2013, when she took over the central bank chairmanship from Sergey Ignatiev.If external financing slams shut for state-owned banks and companies, the government may have to provide them with a total of $40 billion to $90 billion in foreign-currency assistance in 2014-2015, according to the Higher School of Economics in Moscow.
“That will be more than a serious burden on Russia’s foreign currency and gold reserves,” Valery Mironov and Alexei Nemchik, from the Higher School of Economics’s Development Center, said in a report.
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