CB Under Fire for Forex Monopoly

After more than half a dozen dead-end complaints to the Central Bank, the Moscow Stock Exchange celebrated a moral victory Monday after a local court ordered the Anti-Monopoly Ministry to investigate the bank for allegedly violating competition laws.

The Moscow Stock Exchange accused the ministry of failing to look into the conduct of the Central Bank, which for more than two years ignored requests from the MSE for a license to trade hard currency.

At the same time, it allowed its brainchild, the Moscow Interbank Currency Exchange, or MICEX, the exclusive right to conduct such trading in the capital, MSE officials argued.

"Ten years after the birth of the currency market in Russia, the Central Bank still treats it like the sacred cow that should belong to it exclusively," said Alexei Mamontov, the head of the Moscow Stock Exchange.

"The CB is violating the law by creating favorites [in the form of MICEX] — especially since it is in charge of issuing licenses for currency trading," Mamontov said.

Although on the books MICEX is an independent infrastructure, the Central Bank, which founded the exchange in the early 1990s, still continues to exert iron-fist control over its operations.

According to Vedomosti, the Central Bank and its daughter companies, including Vneshtorgbank, Evrofinance, and No. 1 savings bank Sberbank, jointly hold a 36 percent stake in MICEX.

The fact that the deputy chairman of the Central Bank occupies the seat of the chairman of the supervisory board at MICEX underscores close ties between the two structures, said the MEC's Mamontov.

The exchange, a closely held company, currently has 22 shareholders of which all but two are banks.

Regardless of what conclusions the Anti-Monopoly Ministry draws from its investigation, the Moscow Stock Exchange will fail if it locks horns with the Central Bank because "even if the ministry orders the Central Bank to issue the license, it can pressure other banks into boycotting the newly formed exchange," said a Moscow-based banking expert who asked not to be identified.

Central Bank representatives refused to comment on the court's decision, which marks the first time the Anti-Monopoly Ministry was ordered to open a formal case against it.

One of the Central Bank's main duties is to regulate money supply, so it is within its authority not to issue licenses for currency trading.

However, there is "always a danger when a central bank tries to control the financial health of the country in defiance of the economic forces," said Richard Hainsworth, the head of a bank rating agency Rus-Rating. "And there are signs that Russia's CB is doing that now."

"The Central Bank's attempts to control currency trading has parallels internationally," he added in a telephone interview.

"For example, the United Kingdom controlled its currency for a long time, but ultimately all methods of currency control which are not consistent with the requirements of the economy fail."

However, some industry watchers argue most banks are not interested in an alternative currency trading system.

"Banks are interested in a free, liberal market, but creating another currency trading floor will not solve the problem," said Vladislav Metnyov, a banking analyst at the Aton brokerage.

Irina Yasina, a banking expert and a former Central Bank spokeswoman, said that even if the Central Bank loses its monopoly by being forced to let MSE open an alternative trading platform, very few banks are likely to abandon MICEX in favor of its competitor.

"The Central Bank has nothing to fear — most banks trust MICEX and would not jump to another exchange," she said.

She added that the Central Bank's move to attract the wrath of the Anti-Monopoly Ministry is unwise.

"It should just let MSE have its license since it would trade in laughable volume," Metnyov said.