08/26/1998 14:46:00 Russia likely to tighten forex controls -analysts
By Mike Dolan
LONDON, Aug 26 (Reuters) - Russia may be forced to tighten
restrictions on the convertibility of the rouble as the only way
to shore up the currency's recent collapse, analysts in London
said on Wednesday.
A scramble for dollars by both banks and citizens in Russia
has seen dollar/rouble rates soar since the country's effective
default and devaluation on Aug 17.
If the rouble continues to weaken at this rate, analysts
said, inflation will acclerate sharply, real incomes will be cut
and social and political tension could rise further.
There may be no alternative to exchange controls if the
government of acting Prime Minister Viktor Chernomyrdin is to
buy some breathing space to stabilise the situation, they said.
"It's unrealistic to expect they can simply use reserves to
calm the situation," said David Simmonds <SMDP.PA>, emerging
markets economist at Citibank. "It will need some other
"If things are to be steadied it must involve some form of
more formalised capital controls and convertibility
Officially recognised dollar rates against the rouble have
risen more than 30 percent in the nine days since an effective
floatation of the rouble was announced, while grey market rates
and street rates for the dollar have more than doubled.
The mark/rouble rate rose 69 percent on Wednesday alone to
be fixed at 7.86.
After being forced to suspend trading on the Moscow
Interbank Curency Exchange (MICEX) on a number of occasions this
week, the central bank rendered Wednesday's trade null and void
and said there would be no fixing during the session.
Analysts said this move may already be a precursor to
further restrictions on the market.
Russia's central bank said earlier on Wednesday it was not
reasonable to intervene in large-scale amounts since it was
practically the only seller of foreign currency around in the
domestic market. It said it spent $8.8 billion in July and
August defending the currency, $1.8 billion since August 17.
Independent analysts said its reserves are now prbobaly less
than $15 billion.
Tension between the government and the central bank has
intensified. Acting Prime Minister Viktor Chernomyrdin said on
Wednesday he was "extremely dissatisfied" with the work of the
central bank over the past two days.
Interest rates are already at punitively high levels and a
further rise in rates to support the rouble would be pointless
in such a panicky market and would only risk accelerating the
meltdown in the banking system, analysts said.
"We're almost certain to get a tightening of restrictions on
rouble convertibility in the next couple of days," said one
Russia economist at a European bank in London.
"In effect in Russia, we've stepped back three or four years
in terms of its transition to a market economy."
Russia's central bank signed a series of International
Monetary Fund (IMF) regulations in June of 1996, including
Article 8 which makes the rouble convertible for current account
The status of this convertibility is likely to be a key
topic of discussion during Russia's negotiations with the IMF
over disbursement of funds due next month, analysts said.
Renewed exchange controls would likely hinge on legally
limiting the amount of foreign currency residents and domestic
banks can buy or freezing hard currency accounts, while
reintroducing an officially determined daily rouble rate.
"We are moving potentially to measures whereby foreign
exchange deposits of the population may be frozen," said Phil
Poole, head of emerging market research at ING Barings in
London. "This calls into question Russia's ability to service
external debt in the short term and certainly into 1999."
But, while economists reckon these controls are rarely
successful in completely preventing capital flight, they said it
may be the only option for authorities in their attempt to
stabilise the situation in the short-term.
Foreign investor confidence is already rock bottom following
the government's effective default and restructuring of its
rouble debt this month. As a result, there may be an implicit
assumption in Moscow that foreigners are going to be absent from
Russian markets for a long to come anyway.
Analysts said the uncertainty surrounding Russia's foreign
exchange policy, the effective default on its debts and the
political implications of rising inflation would continue to
depress the currency in that situation.
They said the new government's priorities of paying wage
arrears, bailing out banks and subsidising industry would
require them to print more roubles and accept a sharp rise in
inflation as a result.
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