INSIDE FINANCE: Stronger Currency Controls Won't Curtail Capital Flight

In recent months, the theme of strengthening currency control has been sounded more and more frequently. The measures urged in this direction have not caused any alarm among the nation's leaders and look practically like a panacea for all of the Russian economy's misfortunes. Strengthening control over currency is treated simply - having stopped capital flight, which in the Russian mass consciousness is seen as the equivalent of theft, the government and the Central Bank will save the country.


I do not think it is worth discussing the differences between theft and the outflow of capital. It seems obvious that if things are bad for capital within the country - with an insane tax system, authorities' unlimited arbitrariness and a lack of laws protecting private property - it will leave. It will not necessarily be used to buy narcotics, yachts, property and diamonds. Fleeing capital may be invested in industry, only in industry located in a different spot on the globe.


The more relevant question is how effective the barriers erected by the government and the Central Bank will be in preventing capital flight.


The best known of these measures requires exporters to sell 75 percent of their hard-currency revenues. Before January 1999, when the government instituted this measure, exporters were required to sell only 50 percent of hard-currency revenues. The measure was justified as a way to increase the influx of hard currency into the domestic market and thereby stabilize the ruble's exchange rate. What happened? If you analyze the statistics of the Moscow Interbank Currency Exchange, or MICEX, where exporters must sell treasured hard currency during a special trading session, the results are unpleasant for the authorities. In January, for example, the volume of hard currency sold during the sessions was a bit less than the amount sold in December, when exporters sold $2.63 billion. Some might argue that January is a bad month for the ruble in any case, given that the volume of hard-currency sales is low because of the holidays. But if we look at February, we see that the figures did not really increase: While $2.5 billion was sold in January, only $2.6 billion was sold in February - the same level as in December.


No liberal economists expected to see a 25 percent growth in hard-currency sales in the wake of the new regulations increasing the percentage of mandatory hard-currency sales and decreasing the time in which export revenues must be repatriated. But they also did not expect there to be no effect at all.


Apparently with the aim of chalking up successes in the battle against capital flight, the Central Bank has decided to try to limit the possibility for Russian banks to work with offshore banks through mutual correspondent accounts. It is too early to say what form these limitations will take, but the plans to move in this direction have been announced. Apparently, the heads of the Central Bank remembered that the Russian banks have formerly fraternal Latvia, which uses numbered bank accounts. It is not hard to imagine how Russian bankers, trying to get around the new rules, are working with islands dear to the heart via Latvian banks, or Swiss ones. Central Bank chairman Viktor Gerashchenko surely will not forbid banks from working with Switzerland. But who knows? Such a maneuver would fully correspond to the "party and government" line.


In this connection it should be noted that even the experience of Belarus has taught the monetary authorities nothing. There they limited or banned everything possible, but this brought about nothing good. Last week it became known that the National Bank of Belarus proposed lowering the obligatory volume of hard-currency sales and that it is also planning to cancel the regulation now in force requiring banks to sell to the government at an artificially low exchange rate 30 percent of the cash hard currency they buy from the citizenry. Thus it appears the ruble is poised to become even less convertible than the unhappy Belarussian ruble, known as the zayats, or hare. The deputy chairman of the National Bank of Belarus has said the republic should end the multiplicity of exchange rates, but Gerashchenko says it is not time to end the special sessions on MICEX.


There is a danger that the following scenario could develop. Exporters do not sell hard currency on the market, so it is shut down. There are specialists working at the Central Bank who remember how the bank operated in this area before 1992. These officials could readily restore the mandatory sale at Central Bank auctions of 100 percent of export revenues repatriated to the country. In this case it would be more appropriate to call the Central Bank the State Bank, but I'm afraid the volume of repatriated hard-currency revenues would fall even further.


Indeed, it is striking how the current government fails to understand that, given the level of development of banking technology, all prohibitions are, to a certain extent, a fiction.