Capital Controls for Russia

December 17, 2014

Bloomberg writer Leonid Bershidsky, under the headline, "Will Ruble's Rout Force Capital Controls?", wrote yesterday on what he called, "the probability that Russia will introduce capital controls."

He asserts his view that President Vladimir Putin is an "anti-Western, authoritarian" leader, noting that in 1998, a leader he views as having the same traits, Dr. Mahathir Muhammed, President of Malaysia, successfully implemented capital controls and brought his nation out of turmoil. Bershidsky then reviews what he calls, the "recipe" for how capital controls worked in Malaysia.

But the author also reports specifically on Putin's advisers calling for capital controls, and moreover, doing so, because Russia is under political attack from the West. He cites in particular, Sergei Markov, an advisor from a different alignment than well-known economist Sergei Glazyev, who reiterated his own policy proposals today, noted below.

Bershidsky writes of Markov,

"His [Putin's] anti-Western advisers are evidently holding up the Malaysian example. 'What can [Central Bank Governor Elvira] Nabiullina do within the market model if she is forbidden to sell too much foreign currency and some of the world's biggest financial players have been ordered to play against her?' Sergei Markov, a pro-Putin academic, wrote in a column on 'Since the reasons for the ruble's fall are political, the response should be political, too. For example, a law that would ban Russian companies from repaying debts to Western counterparties if the ruble has dropped more than 50 percent in the last year. That will immediately lower the pressure on the ruble; many countries have done this. Malaysia is one example. It's in great economic shape now.'"

Glazyev, in an interview to yesterday, repeated his charge that the plunge of the ruble was caused by speculative operations of Russian banks; and called for imposing foreign currency regulations.

Glazyev stated,

"Naturally, that's what the bankers are doing. The Central Bank has given the commercial banks 6 trillion rubles [this is $171 billion, at a rate of 35 rubles to the dollar; note, the rate was 69 rubles to the dollar at close of Dec. 15]. Practically two-thirds of this money was diverted onto the currency market, using this essentially government money against the ruble...The Central Bank has a simple tool for stopping this speculation: impose regulations on foreign-currency positions. This was done in 1998. The banks were simply forbidden to have more foreign currency in their accounts at the end of the day, than at the start. It's simple and effective."

In a related development, State Duma deputy Yevgeny Fyodorov has called for the Russian Prosecutor General to launch a criminal investigation into recent actions by the Russian Central Bank, on the grounds they violated the constitutional mandate for the bank to "defend and insure the stability of the ruble." Fyodorov charged that by floating the ruble and allowing the markets to set the rates, the bank acted illegally.