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Russia: Rouble convertibility means more capital flows

Greater liquidity is expected to flow into the Russian debt markets after the country’s president, Vladimir Putin, successfully pushed for rouble convertibility to be brought forward from January 1 2007 to July 1.

Although the decision to remove restrictions on the currency market earlier this month is unlikely to force a change in central bank exchange rate policy, analysts believe that it will have positive implications. “By relinquishing control over Russia’s capital flows, the Kremlin is effectively taking more responsibility for its actions, since to attract funds into the country and keep them there, economic policy will have to be favourable and more stable,” says Troika Dialog chief economist Evgeny Gavrilenkov.

Balance of flows

Especially in the short term, Russian capital might leave the country as domestic investors look to diversify their holdings, although this should be balanced by greater inflows.

Between the 1998 crisis and 2004, foreigners were not allowed to invest in government securities known as OFZs at all; since then, they have only been able to invest using new “S-type” accounts that were introduced for non-residents to invest in government paper. These required part of the funds invested to be frozen at the central bank for 12 months.

Although in recent months the government has gradually been removing restrictions on the flow of capital entering and leaving Russia, full convertibility is expected to bring even more movement.

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