In May 2003, Russian President Vladimir Putin announced that the Russian ruble would be made fully convertible by the end of the decade. Over the next year, he steadily moved up the target date for this goal. The law on capital controls that was adopted by the Russian parliament at Putin’s behest in late 2003 set a date of 2007 for full ruble convertibility. In an interview on Russian television in February 2004, one of Putin’s senior economic advisers, Aleksei Ulyukaev (who was then first deputy finance minister and is now first deputy head of the Russian Central Bank), said that the projected date for full convertibility might be moved up still further. In May 2004, Putin confirmed that he wanted the Finance Ministry and the Central Bank to prepare to make the ruble fully convertible by 2006, some four years earlier than originally planned.
If this ambitious goal is achieved, it will greatly improve the operating conditions for Russian businesses (especially energy companies) and will foster a more auspicious climate in Russia for foreign investors. But any such move will entail serious risks and will probably be infeasible, particularly if 2006 remains the target date. It is doubtful that the Russian banking system and capital markets are capable of sustaining such a rapid transition to full convertibility. If convertibility is established prematurely, it could lead to wild swings in capital flows, the collapse of Russia’s fragile banking sector, and a severe financial crisis. […]
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