Bank of Russia Supports New Currency Controls
Bank of Russia Supports Putin’s Decision
Russia’s central bank has given its endorsement to President Vladimir Putin’s decision to reintroduce currency controls. This measure was previously avoided by the bank, which preferred higher interest rates to combat the significant devaluation of the rouble in recent months.
Positive Impact on the Rouble
The government announced on Wednesday that Putin had signed a decree implementing capital controls for a selected group of 43 exporting companies. This unexpected move caused the rouble to surge to a two-week high on Thursday morning.
Bank of Russia’s Role
Since July, the Bank of Russia has been raising interest rates by a total of 550 basis points in response to the weakening rouble and inflationary pressures. It is widely anticipated that the bank will further increase borrowing costs on October 27.
Previous Currency Controls
Russia previously imposed currency controls when the rouble experienced a sharp decline after the country’s military involvement in Ukraine in February 2022. The bank initially believed that these measures were not an effective solution. However, it now supports the reintroduction of controls in a targeted manner.
Efficiency and Volatility Reduction
The Bank of Russia stated that requiring the repatriation and mandatory sale of foreign currency revenues for the selected 43 companies can enhance their foreign exchange (FX) sales efficiency. Additionally, it can improve liquidity and contribute to reducing short-term market volatility. This targeted approach ensures that other entities involved in foreign trade remain unaffected.
Timing and Inflation
A high-ranking official with knowledge of the discussions revealed that the reintroduction of mandatory FX sales was necessary to address current FX positions in the market. Another source mentioned that the weak rouble contributes to inflation, which cannot be ignored before the upcoming presidential election in March 2024.
Government Measures and Compliance
The government has specified that the new capital controls will be in place for six months and require companies to submit plans to the Bank of Russia and Rosfinmonitoring, the country’s financial monitoring agency. These plans will ensure compliance with the controls.
Shifting Positions
In early September, Finance Minister Anton Siluanov acknowledged a role reversal between the finance ministry and the central bank. The ministry now favors stricter measures, while the central bank has adopted a more liberal stance. Central Bank Governor Elvira Nabiullina expressed reservations about the effectiveness of the controls.
Expert Opinion
Yevgeny Kogan, a professor at Russia’s Higher School of Economics, believes that the controls will help strengthen the rouble. He emphasized their importance as rate hikes only impact the rouble with a five to seven month delay. Although not the most favorable economic measure, it is currently vital.
