Central Bank Frees Up 'S' Accounts

The Central Bank on Wednesday took a further step toward liberalizing foreign exchange rules by lifting a restriction that held foreigners' profits from direct investments in special "S" accounts.

Foreigners have billions of dollars trapped in such accounts -- mainly from bond transactions -- which were frozen during the crisis in August 1998. By lifting the restriction, the Central Bank is getting rid of another holdover regulation that discouraged investors.

The immediate effect of the measure may be negligible, analysts say, since investments from the S accounts are worth only tens of thousands of dollars. The Central Bank's move, however, sends another positive signal to investors.

"Any liberal measure is seen as part of a broader attempt by the government to liberalize its relations with creditors," said Kasper Bartholdy of Credit Suisse First Boston.

The bank has been slowly liberalizing regulations over the past year. The most notable changes have been the lifting of restrictions on the repatriation of coupon payments on several types of securities and a reduction of the compulsory sale of foreign currency revenues from 75 percent to 50 percent.

Others measures included adopting regulations that allowed Russians to invest up to $75,000 in foreign securities and buy Russian Eurobonds.

By introducing these changes, the Central Bank is only legitimizing operations that were already conducted through quasi-legal schemes.

Even so, "If the Central Bank is becoming less involved with the management of capital flows, it's a strong sign that there is a potential for changes in the banking industry," said James Fenkner of Troika Dialog.

Other analysts were skeptical, saying that the Central Bank is still going way too slow on amending forex regulations.

"It is clear that the restriction that has been lifted was senseless and harmful," said Renaissance Capital's Alexei Moiseyev. "But it is too bad this measure only concerns direct investment. To me what the CBR is doing looks more like a face-lift than a radical reform."