Russia’s central bank is weighing the introduction of temporary capital controls if the flow of money out of the country intensifies, according to two officials with direct knowledge of the discussions.
Such measures would be preventative and used only if net outflows rise significantly, the people said, who asked not to be identified because no decision has been made. They didn’t give a timeline or a level that may force such a move, saying they are looking at all possible scenarios.
The ruble weakened to a record low, breaching the level where the regulator steps in to support the currency.
The deliberations are the latest sign that U.S. and European sanctions are hurting Russia and making its monetary authority rethink policies it sought to avoid. The Economy Ministry last week raised its estimate for this year’s outflows to $100 billion, a 64 percent jump from last year.
Central bank Chairman Elvira Nabiullina, a former economic aide to President Vladimir Putin, said in an address to the government on Sept. 25 that “introducing capital controls doesn’t make sense.”
Countering Exodus
Still, if trade restrictions — such as the U.S. and EU sanctions and Russia’s retaliatory measures — are prolonged and the country’s tax burden rises, capital outflows will intensify, Nabiullina said. That will push the regulator to shift its focus more toward ensuring financial stability from fighting inflation, and to use various instruments “including non- standard” means, she said.
The central bank isn’t considering imposing limits on cross-border capital flows, it said in a statement responding to the news on its website. The Finance Ministry isn’t discussing such measures, Svetlana Nikitina, a spokeswoman, said earlier by text message.
“Authorities are becoming increasingly concerned about the economic damage inflicted by the continuing crisis in Ukraine,” Neil Shearing, chief emerging-markets economist at Capital Economics, says in e-mailed note. For now, “any such move will remain a measure of last resort.”
Russia has sold about $40 billion of foreign currency this year to prop up the ruble and counter an exodus from local assets that accelerated after Putin annexed Ukraine’s Crimea peninsula in March. Policy makers last intervened in May.
Free Float
In August, the central bank widened the ruble’s trading band and said it would begin market interventions when the currency crosses 44.40. The ruble fell 0.5 percent to 44.4457 against the central bank’s target basket of dollars and euros, before recovering to 44.2249 at 7:29 p.m. in Moscow. The central bank doesn’t get involved in the market after 6 p.m. Ten-year government bonds retreated, pushing the yield up six basis points to 9.42 percent.
Russia is preparing to shift to a freely floating ruble, abandoning a 15-year policy of tapping reserves to control currency movements in favor of using interest rates to manage inflation. The central bank raised the key rate by 2.5 percentage points to help prop up the currency this year even as the economy teeters near recession.
The Economy Ministry said outflows may drop to $50 billion next year if the geopolitical situation stabilizes and borrowing costs are little changed, after raising this year’s estimate to $100 billion from $90 billion in its macroeconomic forecast published Sept. 26. Russia hasn’t had a net inflow of private capital since 2007, the year after lifted restrictions.
Capital Flows
Russian companies and banks will need to repay $53.5 billion in international debt in the fourth quarter and as much as $106 billion in 2015, according to central bank data.
A return to capital controls would set Russia back a decade, dimming the country’s chances to develop Moscow into an international financial center. Before 2004, all currency transactions in Russia were done through special accounts in the central bank, which approved the operations in foreign currencies. All limits on capital flows were removed in 2006, a month before the Group of Eight summit in St. Petersburg.
Russia may return to the special accounts method if a decision is made to impose capital controls next year, said the people, who have direct knowledge of current deliberations. In that case, the transactions in foreign currencies would be carried out through several state banks, one of them said.
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