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. Last Updated: 07/27/2016

CB to Crack Down on 'Hot Money'

VedomostiOleg Vyugin
Russia will impose restrictions on short-term capital inflows in an attempt to prevent destabilization in the capital markets, the Central Bank said Wednesday.

"It seems we will have to use the power granted to us by law to restrict the growth of nonresident's liabilities in the banking sector," Deputy Central Bank Chairman Oleg Vyugin told the Gazeta newspaper.

"We are preparing a mechanism to regulate the inflow of 'hot' money into the country," he added, referring to short-term, often speculative investments designed to take advantage of currency appreciation.

"Hot" money invested in government and corporate bonds, ruble accounts and some stocks amounted to between $5 billion and $6 billion in the first half of 2003, Vyugin said, adding that an increase is expected around the time of the March presidential election. He would not say what particular mechanism he had in mind. But a new law on currency regulation, which takes effect in June, will allow the Central Bank to require up to 20 percent of incoming capital investments to be parked in interest-free accounts at the Central Bank for up to a year.

Vyugin stressed that the Central Bank would only target short-term investments, which it considers dangerous to market stability. "We must protect our financial system by cutting the attractiveness of schemes like the following: You raise short-term funds from nonresidents, place them in the country, earn money and take it outside the country," he said.

Restrictions to counter the problem have been mulled for years, but never before has a senior Central Bank official spoken certainly about implementing them.

Many economists said that the nation's financial markets "remain weak and limited" and agree that noncommitted money could be destabilizing.

"The main problem is too much money coming here," said Alexei Moisseyev, chief economist at Renaissance Capital. As a result, ruble appreciation has been too fast, and competitiveness in the economy has not kept up. Regulation would be "negative for the market but positive for the overall macroeconomic situation," he said.

Many economists, however, expressed doubt as to whether the government could stem the flow. Al Breach of Brunswick UBS said he favors the law because Russia's capital markets are young, small and vulnerable and "because the banks cannot regulate the market just yet." But he fears the attempts to discriminate between so-called "hot" and "long" money encourages corruption and bureaucracy.

Anton Struchenevsky of Troika Dialog said limiting capital inflows will limit the ability of the private sector to borrow.

"If the Central Bank cannot cope with [illicit] capital flight under the cover of service imports," it won't be any good at controlling speculative flows, said Vladislav Oreshkin of UFG.

Besides, "speculators have a perfectly valid role in any market because they provide much needed liquidity to the system," said Alex Kantarovich of Aton.