Russia Seen Weighing Capital Controls If 2015 Outflows Mount

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Russia Currency Interventions
A customer counts out ruble banknotes at a stall selling dairy products inside the Dorogomilovsky food market in Moscow, Russia. The risk of continued capital outflows may hinder the central bank’s emergency measures to stabilize the ruble and the financial system, which have included interest-rate increases and $88 billion in currency interventions. Photographer: Andrey Rudakov/Bloomberg

Russian capital outflows more than doubled to a record last year and the government may resort to currency restrictions if the pace doesn’t ease in 2015, according to a Bloomberg survey of economists.

Net outflows soared almost 10-fold to an estimated $72.9 billion in the fourth quarter from the previous three months, pushing last year’s total to $151.5 billion, the central bank said on its website today. That compares with $61 billion in 2013. Capital controls are likely if private money leaves at a $240 billion annualized rate in 2015, or $60 billion this quarter, according to the median estimate of 14 economists.

Capital flight is bleeding an economy already squeezed by sanctions over Ukraine and the lowest oil prices since 2009. With investors heading for the exit, outflows are blunting efforts to reverse Russia’s biggest currency crisis since 1998, undermining business confidence and driving up borrowing costs.

“We now think that Russia is willing to tap more intensively one of the dearest reserves it still has: central bank credibility,” said Wolf-Fabian Hungerland, an economist at Berenberg Bank in Hamburg. “Should capital outflows not decline, the last option effective in the eyes of the central bank would be capital controls.”

Repayments of external debt by lenders and companies were a “significant factor” for last year’s increase as sanctions reduced opportunities for refinancing, the Bank of Russia said in a statement. Capital outflows will be “positively affected” by smaller debt redemptions next year, it said.

Emergency Measures

The risk of continued capital outflows may hinder the central bank’s emergency measures to stabilize the ruble and the financial system, which have included interest-rate increases and $88 billion in currency interventions.

The ruble, which weakened 46 percent against the dollar last year, is also the world’s second-worst performer in 2015 among more than 170 currencies tracked by Bloomberg. It traded 0.6 percent stronger at 64.9205 a dollar at 9:36 p.m. in Moscow.

The central bank replaced its head of monetary policy two days ago after President Vladimir Putin criticized the regulator for not reacting to the crisis more quickly. Dmitry Tulin will take on Ksenia Yudaeva’s role in the biggest leadership change since Governor Elvira Nabiullina took charge in June 2013. The appointment will probably result in changes to monetary policy, Andrey Belousov, a Kremlin economic aide, told reporters in Moscow yesterday.

Tulin will assume the post on Jan. 21, the central bank said today.

Capital Flight

The central bank predicted last month that outflows may decline to $115 billion to $120 billion in 2015 after reaching an estimated $134 billion last year. The World Bank projects this year’s outflows at about $105 billion. Fitch Ratings, which downgraded Russia to the lowest investment grade this month, sees 2015 outflows at $130 billion.

Russia in 2006 became the only one of the biggest emerging economies to allow unrestricted flows of money across borders. Reintroducing such limits would undermine the country’s monetary-policy achievements, Nabiullina said in October. Officials from Putin to Economy Minister Alexei Ulyukayev have said Russia has no plans to limit capital movement.

“The inability of Russian companies to roll over or refinance their debts -- due to sanctions -- has pushed up volumes of outflows, increased pressures on the ruble and has undermined significantly the stability of the Russian financial system at large,” Vladimir Tikhomirov, chief economist at BCS Financial Group in Moscow, said by e-mail.

Belarus Controls

Some of Russia’s neighbors have already had to resort to restrictions on cross-border money flows as the fallout from the currency rout rippled through the region. Belarus last month tried to fence off its economy with capital controls. It’s since been dismantling the limits and allowing its currency to devalue.

While Russia has so far skirted similar measures, the government last month ordered OAO Gazprom and four other state-controlled exporters to cut foreign-currency holdings by March 1 to levels no higher than they were on Oct. 1.

A shift to capital controls doesn’t square with the central bank’s recent polices, such as its move to targeting inflation and allowing the ruble to trade freely, according to Dmitry Dolgin, an economist at Alfa Bank. Even so, possible triggers include faster outflows and a further destabilization of the ruble, he said.

“Capital controls would be difficult to enforce currently,” said Dmitry Polevoy, chief economist for Russia and the Commonwealth of Independent States at ING Groep NV in Moscow, who also says the restrictions aren’t likely. “These measures would serve as the last option for the ruble stabilization in a scenario of a further decline in oil prices and a renewed panic among corporates and population with soaring devaluation expectations.”

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