Russia won't block capital flight despite weakening rouble

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Russia won't block capital flight despite weakening rouble

Russia won't block capital flight despite weakening rouble
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Russia’s central bank says it is not going to block people moving their money out of the country.

This comes as bank governor Elvira Nabiullina – a protege of President Putin’s – tries to find policies to cope with the rouble’s rapid decline, while facing major economic problems from sanctions.

Flight of capital has accelerated since the Crimea crisis.

The equivalent of $35 billion left the country in January and February alone Economy Minister Alexey Ulyukaev said.

That compares with an estimated $63 billion in the whole of last year.

Russia’s central bank insists its current monetary policy is strong enough to provide financial stability and the imposition of capital controls is not on the table, even with the rouble near record lows.

Political decision

The Russian rouble has been weakening since the start of the year, along with the Turkish lira and other emerging market currencies. But Russia’s declaration in early March of its right to intervene in Ukraine caused the rouble to fall faster, costing the central bank more than $20 billion in interventions to defend it.

“When any central bank intervenes heavily in the forex market, selling its reserves, one wonders how long it is going to continue its policy. One of the alternatives to not spending reserves is capital controls,” said Alexander Morozov, chief Russia economist at HSBC in Moscow.

Russia’s gold and foreign currency reserves, the world’s fifth-largest, stand at $494 billion, giving the central bank some room to manoeuvre.

But Morozov, who also said there is no need for now for any capital restrictions, reckons there is also a political reason behind the stance of monetary officials.

Russia introduced capital account liberalisation only in 2006, spending years to repair the damage caused by the financial chaos after the fall of the Soviet Union in the 1990s.

“It was done to make the Russian economy open as an OECD (Organisation for Economic Co-operation and Development) economy and it’s still one of the more paramount political objectives of the Russian political leadership,” Morozov said.

“Any stepping back would be like an admission of failure, so it’s a political issue.”