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. Last Updated: 07/27/2016

Ministry Wants Forex Rule Scrapped by '04

Further liberalization of currency controls in Russia, proposed by the Economic Development and Trade Ministry, would help the government fight inflation and resist slowing trends in economic growth, analysts said Thursday.

The ministry has drafted a bill aimed at gradually phasing out by 2004 obligatory sales of hard currency revenues by exporters, currently set at 75 percent of total export earnings.

"Relaxing exchange controls has obvious strategic significance as part of the overall liberalization of the economy and efforts to improve the investment climate," United Financial Group said in a market note.

Russia introduced compulsory sales of hard currency by exporters in the wake of the 1998 financial crisis to prop up the falling ruble and beef up reserves for foreign debt payments as the government at that time faced a default.

President Vladimir Putin has made liberalization of currency controls one of the priorities for his administration. The State Duma last Friday backed Putin's drive and approved a key bill cutting the volume of mandatory sales by one-third to 50 percent. The draft has to be approved by the upper chamber and signed into law by Putin.

Hot on the heels of this much-awaited cut, the Economic Development and Trade Ministry proposed to reduce export sales to 25 percent in January 2003 and abolish them altogether by January 2004.

The ministry also proposed to extend to 360 days from various shorter periods a deadline for repatriating export proceeds, with the exception of oil and gas exports.

For oil and gas exporters, major contributors to the state coffers, the deadline is left unchanged at 90 days.

Analysts said the proposed measures would reduce the inflow of hard currency to the country and the Central Bank would stop printing the rubles it needs to buy export revenues.

These measures would stop real ruble appreciation and rising inflation, which threatens to slow growth.

"We welcome the ministry's initiative as an indication of the government's willingness to move in the right direction," Aton brokerage said.

Analysts said the bill, yet to be considered by the government, was likely to sail through parliament as did about 150 government bills that form the backbone of structural reforms and which the Duma has supported this year.

However, the draft would face strong opposition from the Central Bank, a major buyer of the export proceeds it needs to build up reserves and control the ruble rate with dollar sales.

Central Bank Chairman Viktor Gerashchenko openly opposed the bill on slashing the volume of export revenue sales to 50 percent and failed last Friday to get parliament to postpone its debate on currency liberalization.

The Central Bank wanted to keep the 75 percent limit to help it build up hard currency reserves. Gerashchenko has said reserves should reach $45 billion to help economic stability.

Russia's reserves currently stand at $35.6 billion, a post-Soviet high.

"We believe that should the foreign currency reserves not reach the $45 billion target, Gerashchenko would oppose the liberalization of currency controls," wrote Natalya Orlova, an analyst at Alfa Bank.