Russian Government and Central Bank Clash over Extension of Capital Controls

The Russian government and its central bank find themselves at loggerheads over the efficacy and necessity of capital controls imposed in October 2022. The crux of the disagreement lies in the scheduled expiration of the current measures on April 30, 2023, which require exporters to convert foreign currency earnings into rubles. This discord highlights the ongoing debate within Russia’s elite class about how to steer the country’s sanctions-stricken economy.

Government’s Argument for Extension

The government’s case for extending capital controls rests on three main pillars:

1. Stabilization of Domestic Currency Market: The government asserts that capital controls have successfully stabilized the domestic currency market by ensuring an adequate level of foreign exchange liquidity. They credit these controls with preventing a sharp depreciation of the ruble and maintaining a semblance of stability in the financial system.

2. Compliance by Exporters: The government claims that exporters have largely complied with the capital controls, contributing to the stabilization of the ruble’s value. This compliance has helped stem the outflow of foreign currency from Russia and supported the government’s efforts to bolster the ruble.

3. Positive Impact on Imports: The government maintains that capital controls have assisted Russia in managing imports amid sanctions. By limiting the availability of foreign currency, these controls have prevented a surge in imports, thereby supporting the country’s economic stability and preventing a drain on its foreign exchange reserves.

Central Bank’s Dissent

The central bank, however, takes a more measured view of the impact of capital controls. Its primary objections are as follows:

1. Moderate Impact of Capital Controls: The central bank contends that the impact of capital controls on the foreign exchange market has been moderate. It attributes the ruble’s recovery to high interest rates and robust export revenue growth, rather than capital controls. The central bank argues that these other measures have been more effective in stabilizing the currency market.

2. No Compelling Reason for Extension: The central bank argues that there is no compelling reason to extend the mandatory sale of foreign currency earnings. It believes that other measures, such as interest rates and prudent fiscal policy, have proven effective in stabilizing the currency market. The central bank sees no need to continue with capital controls, which it views as a temporary measure.

Historical Precedents of Disagreements

This is not the first time that the Russian government and the central bank have publicly disagreed. In August 2022, Putin’s chief economic adviser, Andrey Belousov, criticized the central bank’s monetary policy, leading to a public response from the central bank governor, Elvira Nabiullina. This incident highlighted the tensions between the government and the central bank, which have occasionally spilled over into the public domain.

In a memorable quip, Nabiullina referred to the criticism as a “drunkard’s search,” alluding to the cognitive bias of searching for solutions in areas where it is easier to find them, rather than where the problems lie. This comment underscored the central bank’s frustration with the government’s criticism and its belief that the government was focusing on the wrong issues.

Conclusion

The ongoing debate between the Russian government and the central bank over capital controls reflects the complexities of managing an economy under sanctions. While the government emphasizes the effectiveness of capital controls in stabilizing the currency market, the central bank maintains that other measures have had a more significant impact. The outcome of this debate will shape Russia’s economic policies in the coming months, as the country seeks to navigate the challenges posed by international sanctions.

Ultimately, the decision on whether to extend capital controls lies with the Russian government. The central bank’s objections notwithstanding, the government may choose to extend the controls if it believes that they are necessary to maintain economic stability. However, the government may also decide to heed the central bank’s advice and lift the controls, signaling a shift in its approach to economic management.