What are capital controls and how is Russia seeking to use them to ease the pain of sanctions? Business News

Capital controls are any means by which a government, central bank or other financial body could act to regulate the flow of cash into or out of a given country.

Transaction taxes, volume restrictions, income and export tariffs, and minimum stay requirements are all examples of monetary policy instruments that could be implemented by a state to give greater control over its economy in times of adversity.

A capital outflow control is designed to prevent citizens from acquiring assets abroad, while the reverse, preventing foreign speculators from buying domestic assets, is known as a capital inflow control. .

These measures can be economy-wide or used to target specific industries or sectors and are most often invoked to support a faltering financial system or a stressed currency.

While liberal free-market economists used to view these controls as regressive and harmful to economic growth, a succession of disasters ranging from the Latin American debt crisis of the early 1980s to the financial crisis is- in the late 1990s demonstrated the danger of exposure to volatile capital. flow and has led to a revisionist reassessment of the merits of the practice.

Recent examples of capital controls deployed to restore stability include Iceland between 2008 and 2017 in response to the collapse of its banking system during the global financial crisis and Greece between 2015 and 2019 when the country was taken in the European sovereign debt crisis. .

Today, the principle is demonstrated in Russia, where the Moscow central bank has been forced to undertake damage limitation exercises in response to heavy economic sanctions imposed by foreign governments on its individual banks, corporations and wealthy oligarchs in as punishment for Vladimir Putin’s invasion of Ukraine.

The value of Russia’s currency, the ruble, hit historic lows in response to the self-inflicted unrest.

As a correction, the Russian central bank announced that its main interest rate would more than double, from 9.5% to 20%, to counter the threat of rapid depreciation and higher inflation which would erode citizens’ savings.

“The external conditions of the Russian economy have changed dramatically,” the bank said in a statement, to put it rather mildly, adding that it expects the increase to “ensure” higher deposit rates. .

It also imposed a number of capital controls, including ordering companies to convert 80% of their foreign currency earnings into roubles, expanding the range of securities that could be used as collateral to secure loans, and temporarily banning Russian brokers to sell securities held by foreigners. – potentially hampering plans by sovereign wealth funds in Norway and Australia to reduce their exposure to Russian companies.

This followed announcements by the central bank that it would resume domestic gold buying, launch a no-limit buyout auction and ease restrictions on banks’ open currency positions.

Russian Finance Minister Anton Siluanov also said Putin’s government was ready to bolster the capital base of commercial banks if it became necessary.

The central bank has itself been targeted in the Western response to Ukraine’s outrage, with political leaders in the US, EU and UK seeking to restrict its ability to deploy its 470 billion pounds of foreign exchange and gold reserves while cutting Russia’s major banks from the Rapid Financial Network, making it harder for lenders and businesses in the country to make and receive payments.

While Russia has insisted that its banking system will operate as normal with citizens able to use their credit and debit cards as usual, bank runs have nevertheless already started to take place over the weekend. , as people lined up at ATMs looking to quickly withdraw money from their accounts in the event of a shortage.

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This notice was published: 2022-03-18 12:46:18

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