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. Last Updated: 07/27/2016

Duma Rolling Back Cash Controls

The State Duma took the first step on Friday towards scrapping a large part of the strict exchange and capital controls imposed after the country's 1998 financial meltdown.

The bill, mandated by the government and the Central Bank, is designed to make the ruble fully convertible by 2007 and to boost foreign investment.

In the first of three parliamentary readings, deputies approved the bill by 287 votes to 117, with four abstentions.

The new legislation will allow Russians to open bank accounts abroad, scrapping the existing practice of granting case-by-case permission for transfer operations. Businesses and individuals will be required to notify authorities.

Russian banks have cold-shouldered the new bill, fearing the country's banking industry may not be ready to compete with foreign peers, who can offer cheaper funds and better service.

"There is widespread concern the bill could negatively affect Russia's banking system," First Deputy Finance Minister Alexei Ulyukayev told deputies. "We are ready to address the issue during the second reading of the draft."

Under the bill, the authorities will retain tools to control short-term capital transfers until 2007, in order to ensure financial stability in case of a sharp decline of foreign currency reserves or severe fluctuations of the ruble.

The Central Bank may require money earmarked for such operations to be frozen for up to a year to maintain the stability of Russia's balance of payments, according to the proposed bill.

The bill would also scale down the amount of hard currency firms must sell on the local market, a rule imposed after the August 1998 financial crisis, when the ruble crashed and companies became reluctant to hold the currency in their vaults.

Under current legislation, Russian exporters have to sell half their hard currency export receipts. Under pressure by the business lobby, officials hope to lower the ceiling to 30 percent, giving the Central Bank a right to vary the rate under that cap.

Required sales of export revenues have helped the Central Bank build up its foreign currency reserves, which rose to all-time highs of $54.6 billion at the start of March.