Russia has decided not to implement partial capital controls following speculation that the extreme measure was being considered to stem the falling ruble, the Russian business newspaper Vedomosti reported.

Capital control is a measure a government, central bank, or other regulatory body takes to limit the flow of foreign capital in and out of the domestic economy.

Bloomberg had reported that Russia’s government and its exporters discussed the move on Monday amid a slump in the currency not seen since the start of Vladimir Putin’s full-scale invasion of Ukraine. The Financial Times had said that large exporters in Russia could be forced to convert up to 80 percent of their foreign currency into rubles to raise demand for the currency.

Other proposals included a ban on foreign dividend payments and loan extensions and canceling import subsidies as well as limits to currency swaps and foreign currency exporters can take out of Russia. This week, the Bank of Russia announced an emergency interest rate hike from 8.5 percent to 12 percent after the ruble slid past 100 to the U.S. dollar. On Thursday morning, it was 95 against the dollar.

Currency exchange Moscow
People walk past a currency exchange office in Moscow, on August 14, 2023. The Russian ruble slid past 100 against the dollar on August 14, 2023.

But citing government sources, Vedomosti reported on Thursday that it was decided not to implement the measure following talks between Putin and the head of the Central Bank, Elvira Nabiullina.

Before Thursday’s decision, Boris Grozovski, an expert on the Russian economy from the Wilson Center think tank, told Newsweek that Russian authorities were likely to wait to see the impact of this week’s interest rate rise.

“If an interest rate increase works and exporters will obey the government and return some money, then the ruble exchange rate will grow in the coming weeks,” Grozovski said, which would mean nothing would need to be done.

The lower ruble is good for exporters but the Russian government wants the currency at around 80 or 90 to the dollar to lower inflation expectations and import prices, he said.

However, if the interest rate rise does not work “and the ruble continues weakening, and the exporters don’t transfer their money into rubles—then the government will impose capital controls,” he added.

Russia's President Vladimir Putin
Russia’s President Vladimir Putin at the Kremlin in Moscow, on August 16, 2023. Russia was reportedly considering imposing capital controls to stem the falling ruble.

The measures were imposed to protect the ruble just after the invasion started when it faced Western sanctions. The currency fell to 150 against the dollar, before the measures were eased in May when the currency strengthened.

Chris Weafer, chief executive officer of strategic consultants Macro Advisory Ltd, told Newsweek that moving towards tougher capital controls is “one of the options but very much a last resort.”

He noted how Putin had said before, including in previous crises such as in 2009 and in 2015, that imposing strict capital controls is amongst the most damaging for future investment. Weafer said this is because they can “take a long time to reverse the reputational damage even when lifted.”

“So, for sure, it is an option, but one the Kremlin will want to avoid unless the situation deteriorates and it becomes necessary to avoid a crisis,” Weafer said. “Russia is not at that point currently.”

“Part of the problem is that much of the oil sold to Asian buyers is sold to India and is paid for in rupees. Those rupees are not convertible and remain trapped in Indian banks,” he said.

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