Gerashchenko Slams Quick Forex Reform

Central Bank head Viktor Gerashchenko said Wednesday he opposed hasty steps to liberalize the foreign exchange market and favored keeping obligatory sales of hard currency.

President Vladimir Putin said in his state of the nation address last week that Russia should review foreign currency controls to bring them closer to world standards.

But Gerashchenko was cautious in a speech to the Association of Russian Banks. "The ruble exchange rate trend would not stay predictable if quick liberalization of foreign exchange legislation is allowed," he said. "The requirement on obligatory sales of hard-currency receipts corresponds to the targets for development of the financial market."

Russia ordered exporters to sell up to 75 percent of their hard-currency revenues for rubles in the wake of the 1998 economic crisis to prop up the local currency and allow the Central Bank to build up its reserves.

But some economists, including presidential adviser Andrei Illarionov, say the measure is ineffective and should be scrapped. They point out that the ruble has been stable for the past two years.

"Lowering the level of the requirement, or even better, its cancellation, would be a sensible decision," Illarionov said after Putin's April 3 address.

But Gerashchenko said foreign exchange legislation should be liberalized gradually, as scrapping the obligatory sales rule would sharply increase the risk of exchange rate instability.

"If there was quick liberalization, we would not be sure that gold and foreign exchange reserves were at a level sufficient to provide for stability of the [exchange] rate and timely payment of debt obligations," Gerashchenko said.

He said the optimal level for reserves would be $45 billion, which compares with $29.7 billion as of March 30.

"The current level of foreign exchange and gold reserves is insufficient to ensure stability of the national currency at a time when foreign debt is being serviced," he said.

But he ruled out a devaluation, saying export revenues were strong enough to keep the currency stable.

Many economists, including International Monetary Fund and World Bank representatives, have voiced concern that the real appreciation of the ruble and rising inflation could slow down Russia's recent strong economic growth.

"Exports of energy, ferrous and non-ferrous metals, timber and fertilizers are … more than sufficient. There is no need for a devaluation," Gerashchenko said.

He also touched on the problem of capital flight, which Putin estimated at $20 billion a year, saying that the share of total export earnings not repatriated in 1999-2000 had dropped to 3 percent.

By comparison, the veteran Central Banker said almost half of Russia's export earnings in 1992-93 never returned to the country, escaping Central Bank and customs controls.

Some analysts say capital flight could increase if foreign exchange controls were liberalized, but others disagree.

Lev Ratnovksy of the Institute of Financial Research wrote in the Vedomosti newspaper Wednesday that payments for shadowy import deals accounted for at least $15 billion of flight capital per year.

He said customs controls should be improved to legalize imports, while other capital flight could be explained by Russia's poor investment climate.

"Therefore administrative action against capital flight is a hopeless struggle with the consequences and not with the reasons," he said.