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. Last Updated: 07/27/2016

Putin Targets Foreign Exchange

President Vladimir Putin on Monday urged the government to ease restrictions on hard currency transactions now that Russia has been removed from an international blacklist of "hot money" facilitators.

Putin praised the joint work by the government and lawmakers that led to Russia being stricken from the Financial Action Task Force's financial blacklist Friday, but said creating more stringent foreign currency rules would be a step backward and hurt honest businesses and citizens.

"A comprehensive package of laws has been adopted and a financial monitoring committee established ... but this does not mean that we should tighten the screws," Putin was quoted by Itar-Tass as saying. "On the contrary, we should move toward currency liberalization.

"Russians should have equal rights with citizens of any developed country. But at the same time, we should achieve more transparency in the activities of both individuals and legal entities," Putin said.

The president's remarks echoed those made Friday by Prime Minister Mikhail Kasyanov after he rejected a proposal on changes to the hard-currency regime submitted jointly by the Central Bank and the Finance Ministry, which was supposed to be presented to the Cabinet for debate Thursday.

The proposal would have lowered the amount of foreign currency earnings exporters must convert into rubles to 30 percent from 50 percent, which Kasyanov supports. But it did not commit to a deadline for abolishing the mandatory sales altogether. It also would have imposed new controls by giving additional powers to the Central Bank, such as being able to reimpose mandatory sales in certain situations, Kasyanov said.

Instead, Kasyanov said he favored an alternative plan suggested by the Economic Development and Trade Ministry, which he called more liberal and concrete. Economic Development and Trade Minister German Gref wants the mandatory sales requirement lowered to 25 percent starting next year and scrapped completely in 2004.

In the wake of the 1998 economic meltdown, the Central Bank, to support the ruble, introduced mandatory foreign currency sales of 75 percent of all export proceeds, which was cut to 50 percent last year.

The requirement has helped the Central Bank steadily build its foreign currency reserves, which now stand at an all-time high of more than $46 billion.

But the requirement also puts inflationary pressures on the domestic currency, as the Central Bank must spend more rubles in order for it and other buyers to soak up incoming dollars.

In the first half of the year, for example, exporters earned $48 billion in hard currency, according to Central Bank statistics. That would suggest exporters bought $24 billion worth of rubles in the period.

Economists are nearly unanimous in support of currency liberalization, but they are divided on how far -- and how fast -- the Central Bank should proceed.

"It isn't an issue whether or not obligatory currency sales should be lowered and eventually dismantled altogether," said Marcin Wiszniewski, emerging markets analysts with Morgan Stanley in London.

"But it is crucial that ... a balance is struck between the government's goal of ensuring cautious, smooth and orderly liberalization and the ability of businesses to conduct all legitimate, business-related currency transactions with minimum bureaucratic hassle and restrictions," he said.

Christof Ruhl, the World Bank's chief economist for Russia, said the goal of scrapping mandatory sales is justified under current conditions. "For exporters it will mean that they will be free to use their export earnings the way they want -- that's the normal state of affairs," he said.

Other economists, however, were more cautious.

Cutting the requirement to 50 percent last year had no real effect on the economy, because many exporters found ways around the 75 percent requirement in the first place, said Peter Westin, chief economist at investment bank Aton.

"So this will be the first time that we will see a real change, and it is hard to tell what the consequences will be," he said. "Of course, a fast move toward full liberalization will be nice, but it makes sense to cut to 30 percent and wait and see the result."

Oksana Dynnikova, an economist at the Economic Expert Group think tank, agreed that the price of full liberalization could be steep, since the economy has never experienced such a dramatic easing of currency regulations.

"Of course, it is in the interest of the big exporters to have the freedom to use their export earnings as they want," she said. "But if one day they decide to leave it all abroad, it will inevitably result in a rise in the dollar rate and have a negative effect on the whole economy."

Finance Minister Alexei Kudrin said Monday, after the meeting with representatives of the key economic ministers -- the Central Bank, the Economic Development and Trade Ministry, the Tax Ministry, the Federal Securities Commission and the Justice Ministry -- that all parties agree on reducing the rate to 30 percent, but that there was still some disagreement over which capital transactions will require Central Bank approval.

Kudrin said a new proposal would be submitted to the government by Thursday.

Dynnikova said while a compromise may indeed be struck between the major players, the Central Bank is unlikely to take the risk of full currency liberalization.

Ruhl said it would be a good idea to leave a "back door open for the Central Bank" to reintroduce mandatory sales in certain situations because many countries have experienced problems with complete liberalization of capital controls.