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UPDATE 1-Russia's Putin opposes return to capital controls

Published 02/27/2009, 07:36 AM
Updated 02/27/2009, 07:40 AM

(Adds more quotes, background)

By Oleg Shchedrov

NOVO-OGARYOVO, Russia, Feb 27 (Reuters) - Russian Prime Minister Vladimir Putin said on Friday he was against the idea of restoring capital controls following calls from a number of officials to do so to support the national currency.

"Some speak about the need to establish control over capital flows. It is possible in theory but it would mean abandoning ambitious plans of turning the rouble into a regional reserve currency," Putin said.

"It would be a shame to lose such an advantage. The crisis will pass and we need to create the basis for future economic development," Putin said at a meeting with senior members of his United Russia party at his Novo-Ogaryovo residence outside Moscow.

The comment follows calls earlier this month from a top senator and the powerful head of state railways to re-establish capital controls that Russia abandoned in 2006.

Sergei Mironov, speaker of the upper house of parliament, the Federation Council, urged the introduction of a 20 percent tax on firms and banks taking hard currency out of Russia.

The head of state railways Vladimir Yakunin, a powerful Putin ally, also called for immediate exchange controls.

The abolition of capital controls opened the floodgate for foreign capital into Russia but the trend was sharply reversed last year in the aftermath of the war in Georgia and the exodus of investors from emerging markets.

Outflows reached $120 billion last year and another $40 billion left Russia in Janaury, which alongside a sharp fall in oil prices were the key reasons that prompted the central bank to devalue the rouble by 35 percent.

Many government officials have complained the bulk of state money disbursed to banks to help the real economy ended up on the forex market as banks actively bet against the rouble to spur its devaluation.

The central bank this month sent its representives alongside prosecutors to 70 top banks to monitor how the state money is spent -- a move some analysts say amount to informal capital controls.

Russia, struggling with the worst economic crisis in a decade, has released over $200 billion in rescue measures to banks and corporates.

Major state-run banks are the key recipients of aid but some smaller private banks have also gained access to state funds.

Many analysts interpreted comments by Yakunin and Mironov as an attack against Russia's influential Finance Minister Alexei Kudrin, whose ministry is currently working on a painful budget revision in a bid to cut spending.

On Friday, Putin praise the gradual devaluation policies of the central bank, which is run by Kudrin's allies.

"I believe the central bank's activities are justified, balanced, efficient... The central bank must not depend on politics..." Putin said.

"The central bank is not a money-producing factory. It is a top regulator and one of its top functions is to keep an eye on money supply, on inflation, and it is coping with that". (Reporting by Oleg Shchedrov, writing by Dmitry Zhdannikov; editing by Chris Pizzey)

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