Laid to rest

By bne IntelliNews March 1, 2006

Ben Aris in Moscow -

The Kremlin sweeps away the remnants of the 1998 crisis.

Russia's hard currency reserves topped $200 billion at the end of March, making it one of the richest countries in the world in terms of import coverage. And with so much cash in the bank, the Central Bank of Russia (CBR) felt confident enough to sweep away some of its last capital controls.

The CBR nixed a requirement that forces exporters to convert 10% of hard currency receipts into rubles, which will become effective on May 1.

“The 10% requirement was a token sum, but enforcement and maintenance of the rule still required a considerable amount of effort for banks and corporate compliance departments, as well as the Customs Committee and the CBR itself,” says Alexei Moisseev, chief economist at Renaissance Capital.

“Its cancellation represents an important step in reducing bureaucratic red tape and liberalisation of the controls on capital flows.”


The currency controls are a legacy of the 1998 financial crisis when the CBR forced the few companies earning hard currency from exports - mostly oil companies - to surrender 75 cents on every dollar to bolster the CBR's shrunken reserves. The economy began to recover and since 2000 the percentage has been steadily reduced. Last month's nixing of the mandatory surrender requirement marks Russia's complete recovery from the damage caused by the crisis.

“The decision to end mandatory sales of export earnings was motivated by the federal budget's very strong position and the excess foreign currency on offer versus actual domestic demand,” Aton Capital said in a research note. “However, in practice exporters are selling far more currency than the minimum quota of 10%, so the central bank's move won't have any practical impact on domestic liquidity supply.”

The CBR also reduced the reserve requirement for cross-border capital flows - special deposits that are supposed to cool “hot money” flows. Currently companies have between Ruble6 billion-8 billion in CBR currency account deposits.

Transition countries are prone to speculative investments that take advantage of the high returns that such economies often offer, but these funds are prone to leave just as quickly as they arrive. In times of trouble, large hot money outflows exacerbate problems by destabilising currencies - as the socalled “Asian Tigers” learnt to their cost in 1997. But Russia’s cash-pile is now so big, the CBR is more confident it can cope with even the nastiest downturn.


Dropping the reserve requirements is expected to impact the ruble debt market and especially the increasingly popular Finance Ministry bonds, or OFZs. Currently, foreign investors who wish to invest in OFZ bonds need to deposit 15% of the incoming capital in a non-interest bearing account with the CBR for one year. The requirement for all other ruble-denominated bonds is 2%. But from May 1 the requirement will be cut to 7.5% and 1% respectively. In real terms, the change will add 100 basis points to a 180-day investment in long-term OFZs, say analysts.

Countries usually hold enough reserves to pay for three months' worth of imports.

However, with enough money in the bank to cover more than a year's imports, Russia has become an unacknowledged “Slavic Tiger”

and one of the three richest countries in the world in terms of import coverage, head and shoulders above the rest of Europe.

The remaining currency controls will go at the start of next year. Finance Minister Alexei Kudrin was planning to lift the last of the currency controls this year to make the ruble freely convertible, but will delay the dropping of the last controls until next year.

Analysts say they expect the last of the capital controls to be swept away by January 1, 2007.

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