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On July 7 2003 Russian president Vladimir Putin signed an amendment to the Law on Currency Regulation and Control (Currency Law). The amendment, effective as of July 10 2003, lowers the level of exporters' foreign currency earnings subject to mandatory conversion into Russian rubles pursuant to a sale to the Central Bank of the Russian Federation (Central Bank) or to an authorized bank from 50% of the exporters' hard currency earnings to a figure to be set by the Central Bank but not to exceed 30% of such earnings. After the signing of the amendment, the Central Bank announced that it had set the mandatory sale level at 25%, also effective as of July 10 2003.

The amendment was driven in part by the significant improvement in the Russian economic climate since 1998. After years of below par performance against the dollar and the euro, the value of the ruble has risen considerably in 2003 and the Central Bank's foreign currency reserves have increased from approximately $10 billion in 1998 to around $65 billion today. Primarily as a result of high oil prices, foreign currency revenues now significantly exceed the demand for foreign currency in Russia, and, to cover their domestic ruble-denominated costs and expenses, most Russian exporters now convert up to 100% of their hard currency earnings into rubles pursuant to voluntary sales to authorized banks. This has ensured a steady supply of hard currency in the Russian market.

Given these statistics, it could be concluded that since the actual amount of exporter hard currency earnings sales considerably exceeds the previously-mandatory 50% level, the amendment establishing the new 25% level will have no practical effect. The amendment's importance, however, lies not in its correlation with actual levels of sales of foreign currency export proceeds but in the fact that the officially-established percentage of mandatory sale of hard currency earnings is in itself a fundamental indicator of key trends in Russian currency control legislation.

The Currency Law first implemented the requirement that a Russian exporter sell a percentage of its foreign currency earnings in the early 1990s as part of president Boris Yeltsin's initial reforms, which laid the foundation for an open currency market in Russia by granting individuals and companies the right to possess hard currency and to conduct various types of currency operations more freely. The mandatory sale provision was set at 50% of an exporter's foreign currency earnings and was designed to ensure stability in the ruble-dollar exchange rate, to prevent capital flight and to provide Russia with the foreign currency necessary for essential imports. In practice, many Russian companies did not observe this regulation and, in the years preceding the Russian financial crisis of 1998, exporters lobbied for special privileges and developed various schemes to avoid selling any portion of their non-ruble earnings.

After multiple devaluations of the ruble and the drop in Central Bank reserves following the 1998 crisis, the Currency Law was amended. The 1998 amendments included the controversial increase of the mandatory sale provision from 50% to 75% of an exporter's hard currency earnings. Even after this increase in mandatory sale percentage, the actual amount of foreign currency earnings sold in accordance with the Currency Law remained far below government expectations and the flight of hard currency from Russia through illegal channels remained rampant.

Following the improvement in the Russian economy in 1999 and 2000, Russian currency regulations were gradually relaxed. Together with other measures, the amendments to the Currency Law passed in August 2001 reduced the level of mandatory sale from 75% back to 50% of an exporter's hard currency earnings.

In his annual keynote address to the Russian Federal Assembly, President Putin declared his aim of achieving full ruble convertibility in the near future. This position has paved the way for a new stage in Russian currency control liberalization. The amendment appears to be the first step in this process and confirms the government's firm intention to continue currency control liberalization measures.

The position of the Central Bank in establishing the mandatory sale of currency earnings at a level below the maximum percentage authorized by the amendment is especially noteworthy, because the Central Bank had previously been a consistent opponent of rapid currency control liberalization and, in particular, had strenuously resisted any reduction in the percentage of hard currency export earnings subject to mandatory sale. The Central Bank's actions can be interpreted as a sign that it will not actively hinder future currency control reforms and are especially important in light of the preparation of a new law on currency regulation and control, which will establish detailed procedures for achieving full convertibility of the ruble and which is expected to be adopted by the Russian State Duma this fall.

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