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. Last Updated: 07/27/2016

'S' Account Plan to Cure 1998 Hangover

A plan by the Central Bank to scrap restrictions tying up billions of dollars of foreign currency inside the country will finally erase the legacy of the 1998 financial meltdown and underscore a big change in market sentiment towards Russia, analysts said Friday.

After defaulting on its domestic debt in 1998, Russia locked up foreign investors' funds, estimated at 140 billion rubles ($4.42 billion according to current exchange rates), in so-called "S" accounts.

Foreigners were allowed to invest these funds in government securities, corporate bonds or stocks but they could not take anything out of the country.

The only way to repatriate cash is to buy dollars at auctions where the currency is priced above the market rate or by keeping them for months in special non-interest bearing "transition" accounts.

In April, the Central Bank pledged to phase out all restrictions gradually over 12 months as it feared that any abrupt move would trigger a rush for the exit.

"It is a bad scar from the old days. They should get rid of it tomorrow," said Erik Nielsen, a research director at Goldman Sachs.

Ironically, complete removal of the restrictions might not lead to an outflow of funds because much of the money has been profitably invested in Russian bond and equity markets that have recovered strongly after the 1998 crisis, analysts said.

"It does not bother people, but it would be the right thing to get rid of it. People were very upset originally, but it is sort of the last big hangover from 1998," Nielsen added.

The Central Bank has already lifted a requirement to register transactions involving funds from the accounts with the bourse.

This allowed holders of locked ruble accounts to deal freely for the first time and clear up many of the murky schemes used to settle deals under the table, bankers said.

The Central Bank also cut the time that deposits had to be kept in transition accounts to four months from one year.

There is no reliable information available on how many of those funds are currently owned by non-residents as analysts said that most of those eager to leave have left the market.

"It would have a symbolic value as all money that wanted to leave the 'S' accounts left years ago," said Roland Nash, chief strategist at Renaissance Capital.