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. Last Updated: 07/27/2016

Capital Controls to Stay Through 2007

The government's capital control regime, which has frustrated exporters and investors alike, will not be fully lifted until 2007, First Deputy Central Bank Chairman Oleg Vyugin said Tuesday.

After months of wrangling, Vyugin said the Central Bank had finally reached a consensus on the issue with the Finance and Economic Development and Trade ministries and the Federal Securities Commission, and will submit a new draft law to the Cabinet on Wednesday.

Vyugin told a conference that the bill should be submitted to the State Duma by the end of the month. A coalition of Duma deputies, minus Yabloko and LDPR, submitted their own plan Friday.

"This is a very political issue. Five years is too much for the Russian economy," Vyugin told The Moscow Times on the sidelines of the conference. "We hope after several, say five, years the banking sector will be restructured, the macroeconomic track record will be sufficient to create confidence, and then it will be much easier to remove controls."

The bill leaves the mandatory repatriation and sale of a portion of exporters' hard currency revenues in place until 2007. However, the current 50 percent requirement would be lowered to 30 percent from July 1, he said.

"Currency controls are never fully effective," Vyugin said. "They solve only about 20 to 30 percent of the problem. But still they work, especially in less developed countries."

The bill also significantly reduces the Central Bank's power to introduce emergency measures to limit cash outflows should a crisis arise. The bank would retain the right to introduce "account regimes," that is, certain operations would have to go through special accounts with attendant restrictions, comparable to S-accounts, in which foreign investments in the domestic debt market were frozen after the 1998 default.

Vyugin said restrictions on existing S-accounts might be canceled by the middle of next year. "We are planning to remove all the barriers step by step," he said.

The Central Bank will also have the right to demand that entities sending capital abroad deposit an equivalent amount in a special account for two months. This discourages honest investors, because it ties up at low interest rates capital that could be used elsewhere, Vyugin said.

As part of the move to restructure and strengthen the banking sector, recently introduced measures increase transparency in the industry by forcing banks to use the Central Bank's methodology for calculating capital, Vyugin said.

First Deputy Chairman Andrei Kozlov said Tuesday that the bank knows of at least six prevalent schemes used by up to 60 percent of all banks to inflate their capital.