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. Last Updated: 07/27/2016

Duma Trumps State With Own Forex Bill

Not waiting for the government's version, parliament's budget committee Monday surprised the state by recommending its own bill to lower the amount of hard currency proceeds exporters have to sell.

The committee urged State Duma deputies to pass in one session all three readings of its version of the law, which lowers mandatory currency sales for exporters to 50 percent from 75 percent — and removes special privileges for oil companies.

The government, with the president's blessing, has said it wants the rate lowered to 50 percent and that it could happen by the end of the summer. But the budget committee wants to take the new regulations further and end exemptions for privileged exporters, which is something the government is apparently not ready to do.

"Such a prompt scrapping of exemptions may have unpleasant consequences," said First Deputy Finance Minister Sergei Ignatyev. "The government considers it necessary to keep existing exemptions in order to honor obligations already undertaken and to allow projects already under way to be accomplished."

With those remarks, Ignatyev defended the Cabinet's exclusive arrangement with oil majors and other top companies that have been exempt from the 75 percent rule virtually from the moment it was introduced.

"Oil majors sell the required 75 percent, but they are allowed to buy back the dollars under special arrangements," said an official at a top oil company who asked not to be named. "Volumes are committed under pre-financing arrangements."

All major oil companies contacted Monday — LUKoil, Yukos and Tyumen Oil Co. — said they complied with the 75 percent law. Exemptions, however, allow them to buy back with little delay what they sell.

The move to reduce the obligatory sales of export proceeds could not come at a better time from an economic standpoint.

In the second quarter of the year, the nation's capital account balance, which records capital flight, the change in hard currency reserves and cross-border asset sales and purchases stood at negative $2.6 billion, the lowest figure since the second quarter of 1999, the Central Bank reported Friday.

The obligatory sale of hard currency earnings was first introduced in June 1992 at the rate of 50 percent. But shortly after the 1998 crisis, when the Central Bank's foreign currency reserves hit a low of $11.9 billion, the rate was lifted to 75 percent, where it has remained. Since then, reserves have shot up, setting a new record every month since the beginning of the year and hitting a historic high of $35.1 billion last week.

With reserves at a more comfortable level, the government's priorities have changed. Now it is focused on fighting inflation, which threatens its impressive economic record.

"If the assumption is that inflation has a monetary nature, then it is logical to lower sales of export proceeds," said Alfa Bank economist Natalya Orlova. She said, however, that the mandatory foreign currency sale law was not the main reason for the recent jump in inflation.

"The government may have been talking so much about lowering the sales ratio in order to curb inflationary expectations," Orlova said.

Inflation stood at 12.7 percent in January to June 2001, compared to the target of 12 percent to 14 percent written into the 2000 federal budget.

As a result, leading economists have raised their forecasts for the year to as high as 25 percent.

By lowering the amount of dollars exporters are forced to sell, the government reduces the amount of rubles the Central Bank has to print to buy incoming currency, thus lowering inflation. But prices have risen primarily because of increases in tariffs on services provided by gas, power and railroad companies.

"[The reduction of the forex sale rate] looks significant on paper," said Peter Westin, senior economist at Aton brokerage. "But my feeling is that it will have a limited effect."

Westin said there was another reason the government wants to lower the rate — public relations. "Partly, it is done to improve the relationship with the international community," said Westin.