Russia cautious on capital controls

15/05/2010 | Simon Pirani

Russia is wary of imposing capital controls in the face of upward pressure on the rouble despite fears that an appreciating currency could damage its industrial base, deputy finance minister Dmitry Pankin said Saturday

Russia is wary of imposing capital controls in the face of upward pressure on the rouble despite fears that an appreciating currency could damage its industrial base, deputy finance minister Dmitry Pankin said on Saturday in Zagreb.

He said capital controls “could help” to depress the rouble and fend off currency speculation, but added that the “negative effects also have to be borne in mind”. Any decision on capital controls would be taken in the first instance by the Central Bank, Pankin added.

Russian policy in recent years had been to lift controls, “and this has stimulated inward investment”, Pankin said at a briefing. However he said that policies on exchange rates and fighting inflation would have to be balanced with industrial policy.

Pankin said the rise in the crude price above an assumption of $58 a barrel meant that with revenues from oil much higher than expected, discussions on amending the budget centered on whether to keep the deficit at the planned level of 6.8% of GDP or bring it down to around 5.5%. Brent crude closed last week just below $78. However Pankin said “the general direction is clear” - to return to a balanced budget by 2015.

A final decision on issuing a sovereign bond this year is now unlikely before September, Pankin said, adding that the volume would probably be around $7.5 billion. “The idea of issuing paper for the world markets denominated in roubles is interesting, and we are now analyzing the pluses and minuses.”

Meanwhile a senior Russian economic development ministry official delivered a disarmingly frank assessment this weekend of the perils of doing business in the country to a seminar at the EBRD annual meetings.

Dmitry Kvitko, deputy head of the ministry’s investment policy department, said the most forbidding barriers to entrepreneurship and foreign investment were migration rules; construction permit procedures; accessing municipal infrastructure; and customs and tax procedures.

The migration rules obstruct both Russian and foreign businesses trying to bring in highly-qualified foreign staff, Kvitko explained.

He said the construction permit problem had best been illustrated by Komatsu, the heavy equipment manufacturer, which had had to generate a three-metre long set of documents to get approval to build one plant.

Such procedures were “complex and bureaucratized”, Kvitko complained, while businesses trying to access gas, electricity and other municipal services faced “untransparent” obstacles and corruption.

The director of Russia’s flagship PPP project made almost identical complaints about the business environment. Sergey Emdin of Northern Capital Gateway, operator of the modernisation project at Pulkovo airport in St Petersburg, said his company had taken operational control of the airport two weeks ago but still had not found all the documentation it needed.

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