Moscow - Russia will not impose capital controls, the central bank said on Tuesday, easing concerns that restrictions could be introduced to stem capital flight that has accelerated since the Ukrainian region of Crimea was seized by Russian forces.
President Vladimir Putin's assertions of Russia's rights to intervene in Ukraine and make Crimea part of Russia are expected to cause net capital outflows in the first quarter to $50-$70 billion, compared with $63 billion in the whole of last year.
Limiting money flows, once considered a damaging constraint on open markets, has been more accepted in the aftermath of the 2008-2009 financial crisis as a tool sometimes needed to manage financial stability.
But the Russian central bank said its current monetary policy is strong enough to provide financial stability and the issue of capital controls is not on the table.
“The Bank of Russia is not considering at this time the possibility of introducing measures that would restrict the movement of the capital,” the bank told Reuters in an emailed statement.
“Actions taken by the Bank of Russia in the framework of exchange rate policy help contain excessive exchange rate fluctuations, and as such prevent the emergence of risks to financial stability.”
The central bank, which has been gradually allowing the rouble to float more freely, had to halt the process earlier this month and start defending the currency, which has lost more than a tenth of its value this year.
Introducing restrictions on money flows would reduce Russians' demand for foreign currency, but it would also raise borrowing costs for the state and corporations alike.
The finance ministry has spent the past few years building up the country's debt by successfully raising billions in foreign borrowing. This year's plans envisage another $7 billion worth of Eurobonds.
“If such an idea (capital controls) were to be discussed, the finance ministry would be against it,” Deputy Finance Minister Alexei Moiseev, responsible for financial markets, told Reuters on Tuesday.
The Russian rouble has been weakening since the start of the year, along with the Turkish lira and other emerging market currencies.
But Russia's declaration in early March of its right to intervene in Ukraine has accelerated the rouble's fall, costing the central bank more than $20 billion in interventions to defend it.
“When any central bank intervenes heavily in the forex market, selling its reserves, one wonders how long it is going to continue its policy. One of the alternatives to not spending reserves is capital controls,” said Alexander Morozov, chief Russia economist at HSBC in Moscow.
Russia's gold and foreign currency reserves, the world's fifth-largest, stand at $494 billion, giving the central bank some room to manoeuvre.
But Morozov, who also said there is no need for now for any capital restrictions, reckons there is also a political reason behind the stance of monetary officials.
Russia introduced capital account liberalisation only in 2006, spending years to repair the damage caused by the financial chaos after the fall of the Soviet Union in the 1990s.
“It was done to make the Russian economy open as an OECD (Organisation for Economic Co-operation and Development) economy and it's still one of the more paramount political objectives of the Russian political leadership,” Morozov said.
“Any stepping back would be like an admission of failure, so it's a political issue.”
Morozov and other economists in Russia also believe that there is no economic reason to introduce capital controls.
In the aftermath of the 2008 financial crisis, the central bank went through $200 billion of its reserves, but without having to introduce capital controls.
On March 3, after Russia's parliament backed possible military action in Ukraine, the central bank was forced abruptly to raise its key lending rate by 150 basis points to stem capital flight.
It also said it would make daily decisions on regulating the rouble's exchange rate, increasing its scope to make forex market interventions.
The central bank believes these moves are sufficient for now.
The policy, based on “an assessment of the current situation on the currency market, allows (the bank) to respond quickly to sudden changes in the situation,” the bank said in its statement.
Analysts say that central bank will keep employing more conventional monetary policy for the time being.
“Unless capital outflows stabilise, further rate hikes are possible,” said Neil Shearing, chief emerging market economist at Capital Economics in London. - Reuters