ANALYSIS-Soft capital controls won’t stop rouble rally

May 14, 2010

By Andrey Ostroukh

MOSCOW, May 14 (Reuters) – Russia, worried that the rallying rouble will hurt the economy, is moving to discourage inflows of hot cash and cap foreign borrowing, but without full scale capital controls they will at best slow down the appreciation.

Adjusted for inflation, the Russian rouble is already back to pre-crisis levels while gross domestic product (GDP) is not expected to recover to such a point until at least 2012.

Discussions on capital controls in Russia intensified after the International Monetary Fund urged Moscow to be ready to guard against excessive capital inflows and consider a range of measures, not excluding capital controls. [ID:nLDE64A0QV]

Last year emerging peer Brazil, in an effort to control hot money flows, began to tax some share trades involving Brazilian companies and new foreign purchases of local equities and bonds.

“We believe that some form of (Russian) capital controls may be inevitable at some point later this year, but they are likely to be targeted and not necessarily broad-based,” RBC said in a note to clients, calling capital controls a “divisive issue”.

The growing discussion of measures to discourage foreign borrowing and hot capital inflows seems to mark a change of tack for Moscow. Russia is the BRIC country most exposed to foreign capital and has resisted the pressure to reintroduce capital controls during the crisis, preferring instead to spend reserves to cushion the rouble’s depreciation in late 2008-early 2009.

The rouble has now changed direction thanks to higher oil prices, and intervening against an appreciating currency risks fanning inflation — which Russia has only recently managed to get under control. Also bigger interventions go against the central bank’s goal to move to a free float by 2012.

But analysts say that without full-scale capital controls — ruled out again this week by First Deputy Prime Minister Igor Shuvalov — the proposed measures are likely to lack the bite to reverse the rouble’s appreciation.

Corporate borrowing is one of the key targets of proposed Russian measures. But corporate foreign currency debt issuance has amounted to only around $6 billion in 2010 so far — a tiny drop compared to the daily Russian forex market turnover on the MICEX exchange of $3-4 billion.

Differentiation in reserve requirements in favour of long-term liabilities may improve banks’ balance sheets. But the proposal is to lower requirements for such loans, which means conditions for short-term liabilities will remain the same.

Plus analysts fear such rules could be manipulated.

“Any restrictions cause distortion in accounting, search for sideway paths. Once the fence is installed, holes in it will be made immediately,” Vladimir Bragin at Trust said.


The proposed rules will also not dent the rouble’s key appeals such as recovering economy, strong oil prices, the world’s third biggest gold/forex reserves and still high interest rates.

The rouble’s upward drivers also include Russia’s current account surplus and domestic savings preferences — with locals increasingly changing from dollars to roubles.

The rouble has already regained around 62 percent of the planned devaluation of 2008-2009, trading around 33.50 <RUS=MCX> versus the euro-dollar basket, used by the central bank to track currency movements.

Russia posted a current account surplus of $33.9 billion in the first quarter. Barclays Capital estimates monthly de-dollarisation amounted to around $1.9 billion, non-sovereign Eurobonds issuance has been around $2.1 billion, eclipsing portfolio inflows of $1.2 billion a month.

Euro zone financial problems may also spur capital inflows into Russia, deputy finance minister Sergei Storchak has said.

Recently Greek debt woes sparked sell-off in commodity currencies, euro and stocks but the rouble suffered relatively modest losses.

Considering that Russia is far from euro zone debt problems, foreign investors will likely take risks investing into rouble assets given oil prices above $70 per barrel [O/R], said Stanislav Ponomarenko, chief analyst at ING in Moscow.

“Last week was an important test of the stickiness of this year’s capital flows into Russia, and the 2 percent fall in the rouble against the basket was eclipsed by the losses in other EMEA currencies,” Barclays Capital said in a note.

During recent correction in early May the Polish zloty¬† slumped by more than 13 percent while South Africa’s rand lost nearly 8 percent.

(Editing by Toby Chopra)

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