This article presents material on the work of the foreign exchange market as a branch of the government’s financial policy, its role in the economy, and the impact on the balance of payments and foreign trade as a whole. The features of currency restrictions in Russia and their relationship with the country's trade and payment balance are also reflected.
Currency market
This concept reveals the practical side of the financial activities of any state. The currency market is the main venue for the sale of securities and currencies. It should be noted that he obeys the mechanism of supply and demand.
The systematization of the types of foreign exchange markets can be done according to certain categorical attributes: as diffusion (distribution), by types of resources, by degree of restriction.
The international currency market includes all world platforms that concentrate large capital, being the main financial environment of international importance. They are connected by stable communicative connections. Examples of foreign exchange markets of international importance are Asian, European and American. Hong Kong, Tokyo, Melbourne, Singapore, Frankfurt, London, New York, Chicago are the world financial centers.
Functions
Currency distribution of finances implies compliance with the following principles and rules:
- Supporting the movement at the international level of capital, goods and services.
- Exchange rate identification based on real supply and demand.
- Credit and currency risk insurance (hedging).
- The implementation of monetary policy.
- Profit generation as a difference in exchange rates and interest rates on debt obligations.
The concept of currency restrictions is associated with the imposition of certain measures to reduce the turnover of funds and conduct operations in order to maintain the course and balance the economy as a whole.
general description
Currency restrictions - this is a regulation existing at the legislative level in the form of economic, social, organizational and legal measures relating to circulation, operations with currencies of national and foreign origin, as well as with values. The implementation of these requirements in practice is ensured by persons authorized by the state, working in the central bank, customs authorities, and large banks.
Reasons for introducing restrictions
Currency restrictions are a kind of forced measures on the part of the state aimed at overcoming the negative balance of the balance of payments of the country, stabilizing export-import relations, and supporting the national currency. A set of measures to reduce the volume of payments and increase revenues, and to concentrate resources in the apparatus of state power to solve strategically important state tasks, can become tools to achieve these goals.
Historical implication
Historically, the rules to limit the manipulation of cash, gold and various other currency values have always been implemented by the state apparatus and the main administrative bodies both at the administrative and legislative levels. At the heart of their aspirations everywhere and everywhere was the goal of stabilizing and efficiently conducting international settlement operations. This contributed to economic stability within the state and the effectiveness of foreign economic activity.
In the long run, the depletion of reserves of funds and gold in the process of everyday life calls for the introduction of currency restrictions. Foreign exchange control by state authorities was carried out in capitalist countries mainly during crisis periods.
Such restrictions are usually called regulated and ordered relations between the state and business entities through money. Subject to existing restrictions, exporting entities are obliged to provide large commercial banks or authorized state bodies with the proceeds received from transactions in foreign banknotes. Also, in order to reduce capital flight, certain restrictions are imposed on the acquisition of foreign currency and gold reserves, on the export of assets in the form of securities, and on export operations.
Historical facts
The first introductions of currency restrictions date back to 1914–1918, that is, during the First World War. In the postwar years, they were introduced in a number of capitalist countries. The exceptions for a long period of time were the United States, Switzerland and the vast majority of Latin American countries, which introduced restrictions on cash transactions later.
In capitalist and economically developed countries, currency restrictions were imposed by slow forward movements. At the end of World War II, Western European countries implemented some mitigation procedures for currency restrictions. So, for example, France allowed the free import of francs from abroad and the free circulation of gold inside the country. The rate of free export of French national currency also increased at a fast pace. Since 1959, the French government introduced the rule of equivalent exchange of the dollar to the franc (for foreigners). Great Britain in the sixties also allowed the exchange of pounds for dollars. Following these actions, intentions to introduce a partial convertibility of national currencies into dollars were made public by the governments of countries such as Germany, Switzerland, Belgium, Italy, and the Netherlands.
Types of restrictions
Currency restrictions are generally divided into the following types:
- Concentration and concentration of foreign exchange transactions in the central bank or in authorized (they are also called slogan) banks.
- The official permission of foreign exchange transactions.
- Partial or complete deactivation of currency accounts.
- Restrictions on convertibility with currencies.
Currency restrictions are measures that are to be implemented in areas such as the balance of payments (trading), capital and finance (capital and credit movements, tax payments, credit servicing).
Forms
Transactions of the current nature of any organization imply such restrictions on foreign currency turnover:
- Deactivation of revenue from export operations.
- Full or partial sale of exporters' proceeds in foreign currency without fail.
- State-defined rate for sales to importers.
- Current regulations on forward operations for the purchase of foreign currency by importers.
- Control of time periods and terms of payments for foreign trade export-import operations.
Forms of restrictions on foreign exchange transactions are directly related to the state of the balance of payments and the direction of state capital.
Establishment of currency restrictions with active and passive balance
With the negative (passive) monetary balance of the country, the government is forced to take all sorts of measures to maintain the national currency. The tools to achieve this goal are: minimizing the volume of exported capital to foreign markets and stimulating, in turn, the influx of foreign investment activity.
Specific measures in this case may be as follows:
- banking control;
- imposing restrictions on the participation of domestic banks in providing customers with loans in foreign currency;
- monitoring the activities of the dominant entities of the financial market;
- forced seizure in order to sell securities of foreign origin that are held by residents;
- desire for maximum repayment of external debt.
In the case of an active balance of payments, it may be necessary to impose restrictions on the import (import) of capital. In such cases, it is strategically important to strengthen the national currency. A ban is also imposed on the sale of securities to non-residents, a restriction is established on transactions with them, and the import of currency from abroad is limited.
Objectives of Currency Restrictions
It is these measures that are an adequate reaction of the state administrative apparatus to the crisis situation of the domestic money market, which subsequently can lead to an imbalance in foreign economic activity and a negative balance of payments.
In such a situation, there is a rapid leakage of gold and foreign exchange reserves to countries that lend to the state.
In this context, currency restrictions are attempts by the state to achieve a balance of payments, a balance of economic aggregates, effective foreign economic activity by reducing payments abroad in reserve currency and ensuring the growth of revenues in foreign currency. This, in turn, firmly strengthens the course of national monetary reserves. With the effective implementation of currency restrictions and currency control, monetary resources are concentrated in the hands of state authorities, mainly in the Central Bank or in authorized commercial financial institutions.
Mechanism of action
Restrictions on foreign exchange transactions relate mainly to operations with the import of goods, that is, with import. Government agencies that monitor such transactions identify the necessary areas that could be a priority for currency movement. In this situation, importers have rights to receive, since these funds are necessary to pay for import operations.
Exporters ’obligations include selling at a clearly fixed foreign exchange rate to the main state bank or to the motto banks. Given the level of deficit, which may be critical for the state, a requirement may be established at the legislative level for exporters that regulate the mandatory sale of a certain percentage of revenue.
Coefficient method
Compliance with the differentiated coefficients of foreign exchange premiums to the official rate can bring a positive effect in export-import operations. They can find their application in the process of exchanging revenue from exporters for domestic currency. For the first time, the multivariance of exchange rates was applicable during the global economic crisis of overproduction in the 30s of the last century. In Germany, for example, at that time deviations from the official rate could be from 10 to 90%.
When the state uses currency restrictions, the movement of capital abroad is not allowed in the free order, which is expressed in a complete or partial ban on the transportation of foreign or national currency.
In total, whatever currency restrictions the state would not use, they are inherently a barrier to successful functioning in the context of a globalizing financial system and for integration into the world economic community. Therefore, currency restrictions can be considered as a temporary measure necessary to balance economic stability and increase the importance and role in the foreign market.
Currency restrictions on current operations in Russia
At the present stage, politics is characterized by versatile priority vectors of activity. Currency restrictions in Russia are of the following nature:
- Full sale to the Central Bank of the foreign currency earnings of exporters without fail.
- Imposing a ban on the export of goods for the national currency.
- Establishing restrictions on the sale of foreign currency to importers
- Regulation of advance payments by importers and the establishment of restrictions on the sale of foreign currency.
- Adjusting the timing of payments for export-import trade.
Additionally, in the framework of the implementation of currency restrictions in the Russian Federation, the government also has the right to attract or implement certain instruments to lower or increase the established rate depending on the circumstances and the specific situation. It is this right that any state enjoys in critical situations, and Russia is no exception.