International Communiqué: Russian Ruble Convertible from July 1

June 23, 2006

As Russia prepares to host the G-8 Summit and press for entry into the WTO, the Russian ruble will become freely convertible as of July 1.  This is major news for business people dealing with Eurasia generally, and Russia specifically.          

For those who recall trading US dollars for Soviet rubles at a Moscow “street rate” in the 1960’s, getting 6 times the official rate, this is an historic milestone.  It means that Russia is ahead of China in entering global markets.  Most importantly, it represents an expression of self-confidence based on Russia’s substantial hard currency reserves (owing to high oil production and pricing), and a relatively stable business establishment after years of upheaval.  Although Russia is not “free market” in the Western sense, it is able to let its currency float against other currencies without the instinct of central control.  What does this mean for businesspeople?

In the first place, it will be easier to do business in Russia after July 1.  Foreigners may open ruble bank accounts, and will be able to legally take rubles in and out of Russia.  Restrictions on ruble fixed-income investments will end, and delays and approvals will be avoided in repatriating profits, or otherwise move funds in and out of Russia.

Second, due to the limited scale of the domestic Russian economy, the change will primarily affect the inflow of funds into Russia, rather than the opposite.  It is also logical to predict a significant upturn in foreign direct investment into Russia, something that will spur expansion of the Russian economy’s private sector.  This will be coupled with a need to give assurance to foreign investors in Russia that the reform will not be accompanied by backsliding or manipulation—a challenge for a Government that has exerted central control over oil and other natural resources and caused Western observers to wonder about the rights of private investors.  Commentators differ, of course, on whether the ruble will rise or fall, with a consensus for a year-end Ruble/US$ exchange rate of around 25 at the end of 2006.

Third, free convertibility of the ruble will mean an expansion in Russian fixed-income markets, more globalized financial services, and opportunities for insurance companies, securities firms, and others, to increase their presence in Russia.  It should permit Russian companies to finance their growth by providing ruble-based assets as security, and other assurances priced in rubles.  This should stimulate private sector investment and growth, with more sustainable growth in equity markets, greater lending based on normal banking standards, and the knitting of Russian companies into Western financial markets.  Financial statements should be easier to mesh, allowing foreign investors get a more accurate (though not completely transparent) idea of what Russian private companies report.

As always, Russia will not be obvious or easy for US businesspeople to understand.  The reform of July 1, however, will make it easier to do business in Russia, on a basis more familiar to the Western world.  One more non-physical block has been removed from the wall that began tumbling on November 9, 1989.

Frost Brown Todd has attorneys with Russian language familiarity and has for many years represented US businesses in Russia, and Russian businesses in the USA. 

Photographed at a recent event are (from left): Scott Aiken (World Affairs Council of Greater Cincinnati), Joe Dehner (Chairman, FBT International Services Group), Yegor Gaidar, and Mark Rebstock (past Director, International Visitors Council).  Twice Prime Minister of Russia, Yegor Gaidar was Minister of Economics and Finance under Pres. Yeltsin, and is credited as the architect of the early 90’s reforms that abolished state regulation of prices in Russia—the free convertible ruble is the product of reforms launched under his leadership more than a decade ago.

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