• ACI Russia

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.

((London newsroom +44171 542 6762, fax: +583 7239,

uk.emerging markets.news@reuters.com))

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