Capital controls feared in Russia.

Capital flight from Russia has spiked dramatically since President Vladimir Putin first sent troops into Crimea and may reach $70bn (£42bn) over the first quarter of the year, prompting fears that the country may soon have to impose capital controls to stem the loss.

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“It is shocking,” said Bartosz Pawlowski from BNP Paribas. “Markets have been extremely complacent, fooling themselves that Russia is invulnerable because it has almost half a trillion in foreign reserves. But reserves can become almost irrelevant in this sort of crisis.”

Lars Christensen from Danske Bank said the authorities may resort to some form of financial coercion to lock down funds in Russia. “Capital controls are a serious risk, and should not be discounted. Whatever now happens, there has been permanent damage to the Russian economy because investors are not going to forget this lightly.”
Capital controls are one of the last lines of defense for your foreign currency reserves and for very good reasons as the slap considerable costs on your economy. The more open the economy is, the higher they become. There are of course some situations were capital controls are a must, like in Iceland in it's banking meltdown.

To get a grasp of the dimensions we are talking about it is important to remind us that Russia is a $ 2,000bn economy with a $ 200bn trade surplus in goods.



Keep the accounting logic in mind I explained before. I would not be surprised anyway that we will see a capital flight north of $ 150bn if the crisis continues.

The scale of capital outflows leaves the Russian government in a quandary. The central bank has already raised interest rates by 150 basis points to prevent a collapse of the rouble, but this is choking the economy.

“If rates stay this high for another two or three months, there will be serious trouble,” said Mr Pawlowski. “There is no free-lunch. You can defend your currency, but if you do that you wreck your economy,” said Mr Pawlowski.
I just quoted it because Mr Pawlowski repeats a key problem for Russia which I mentioned earlier. In normal times the central bank does it's monetary policy to help the economy. Now the economy has to suffer to help the central bank to defend it's reserves...