Global Policy Forum

Russia Joins Push to Curb Speculations


By Ira Iosebashvili

November 20, 2009

Russia is considering ways to discourage speculative currency traders from driving up the ruble exchange rate, including a tax on cross-border currency transactions, a central-bank official said Thursday. Such a plan would put Russia in line with other commodity-exporting economies including Brazil and Indonesia, which view inflows of speculative money as a threat to the profitability of their raw-materials exporters.

"We need to develop an effective way of controlling cross-border transactions, something similar to the Tobin tax," said First Deputy Central Bank Chairman Alexei Ulyukayev. Russia would enact such measures only after extensive discussions, Mr. Ulyukayev said at a conference on the ruble in Moscow.

Nobel Prize-winning economist James Tobin proposed a tax on foreign-currency transactions in order to reduce exchange-rate volatility after the 1971 collapse of the Bretton Woods exchange-rate system. Since then, Mr. Tobin's intent has been broadened in policy debate to include wider taxes on financial transactions of other types.

In Brazil, Thursday was the effective date of the government's new tax on Brazilian stocks traded as American depositary receipts. Brazilian Finance Minister Guido Mantega has said the 1.5% tax on ADRs is part of a bigger effort to stem appreciation of the real, which has gained 36% against the dollar so far this year.

Last month, Brazil imposed a 2% tax on foreign portfolio investments into fixed-income and equity accounts. South Korea announced on Thursday several measures aimed at helping local firms better manage foreign-exchange risks and reducing imbalances that have made its market susceptible to bouts of volatility.

To slow the ruble's appreciation, the Russian central bank bought about $21 billion of foreign currency in October and the first half of November, while lowering the country's refinancing rate by 3.5 percentage points this year to an all-time low of 9.5%. The measures have done little to stop the ruble, which has risen by 10% against the dollar since September.

An Indonesian central banker said this month that the country would consider similar controls. Taiwan in November banned foreign funds from investing in time deposits in an effort to deter currency speculation.

In September, Russian Prime Minister Vladimir Putin, hoping to encourage investment, said the country wouldn't reintroduce capital controls, which were abandoned in 2006.

Officials and economists have warned that such tools come with dangers. "Measures designed to limit risk are necessary, but there is no need to go overboard, because then you risk distorting the pricing mechanism," said Konstantin Korishchenko, the head of Micex, the country's largest stock exchange.

It isn't likely that any country would unilaterally introduce a Tobin tax, because transactions would simply migrate to another tax jurisdiction, said Rory MacFarquhar, chief economist at Goldman Sachs in Moscow. Still, he said, Russia's central bank "does have the tools to make it more expensive for banks to borrow abroad." Wednesday, the central bank Chairman Sergei Ignatyev discussed "soft" options for dealing with speculative capital, including limiting foreign borrowing by state-owned firms.

Capital is unlikely to stop flowing into Russia anytime soon, as investor concerns about oil prices and Kremlin policy dissipate, said Chris Weafer, Uralsib chief strategist. "Russia is now in a favorable position, and funds are moving to increase their exposure to a more substantial overweight," he said.

The steps Thursday by South Korea's Financial Services Commission follow a draft plan in September and mark an effort to reduce the risk of swings in currency rates driven by South Korean firms hedging foreign cash flows and managing foreign liabilities. The FSC aims to have the rules take effect early next year. The FSC will limit the size of forward transactions that companies can enter in the foreign-exchange market to a total of no more than 125% of the revenue they are hedging.



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