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Analysis & Opinion
13.05.10 The End Of Shady Transactions
By Tai Adelaja

The countdown has begun for the inevitable closure of a multitude of standalone currency exchange offices around the country that have for months ignored the Central Bank’s advice to legalize their operations by meshing institutionally with authorized commercial banks. A new Central Bank directive, which became effective starting May 10, forbids commercial banks from opening new exchange points, and orders existing currency exchangers to either merge their operations with commercial banks or wind down services before the end of September.

The move was part of the regulator’s efforts to restructure the free-for-all currency market after years of repeated complaints about rip-offs and fraudulent practices from the public. The directive, which marks a departure from the regulator’s past policy that essentially countenanced a laissez faire policy in the currency exchange market, implies that only authorized commercial banks will be able to perform financial transactions relating to the sale and purchase of foreign currencies by individuals.

In the past, exchange points were allowed to flourish outside official control as the regulator tried giving leeway to the country’s nascent capitalism and encouraging business activities that relied on foreign currency operation. Many operators have taken advantage of the oversight by simply acquiring licenses through established banks without formally becoming part of the institutions, as required by the law.

Currency Exchange offices mushroomed in big cities across Russia in the 1990s, as the exchange rate for the national currency became highly unstable and individuals and businesses struggled to cling on to their dwindling savings by converting rubles into foreign currencies, especially U.S. dollars. In addition to guaranteeing convenience by virtue of their ubiquity and cash-on-demand services, some have also offered competitive exchange rates, which many established commercial banks struggled to match, experts say. “People and companies still turn to exchange counters to make transactions because their dollar/euro exchange rates are in most cases still higher than the rates quoted by commercial banks,” Maxim Osadchy, the head of research at the Bank of Corporate Financing, said.

Demand for foreign currency exchange increased in Russia during and after the crisis of 1998, as the ruble weakened in the unregulated market forcing many to seek a measure of stability in the dollars or euro. However, after a decade of oil-fueled economic recovery, the Russian ruble started to appreciate again and Russians are gradually getting rid of foreign currencies.

In January 2010, the public's total demand for foreign currencies — the sum purchased at exchange points, received through conversions and withdrawn from foreign-currency bank accounts — fell by 39 percent to $4.6 billion compared with a month earlier. The figure is also 69 percent lower than at the start of last year, when the dollar rose 20.5 percent against the ruble and the euro gained 10.2 percent, the Vedomosti business daily reported. The number of exchange offices dropped to 709 from 898 in the second half of last year, figures from the Central Bank show. However, about 615 exchange points continue to operate in Moscow and the Moscow region even while 45 out of 89 regions in the country lack any exchange point, the Central Bank reports.

While the financial crisis, with its high volatility and uncertainty in the currency market, has forced owners of many exchange points to close shops, many, especially in Moscow and the Moscow region have survived the crisis and are multiplying. So are complaints from the public about fraudulent activities at some of the exchange points. Last May the Federal Antimonopoly Service (FAS) reported an increase in the number of complaints from the public on the fraudulent practices at many exchange points.

Most of the complaints concerned standalone currency exchangers posting exchange rates on their outdoor billboards that were at variance with the actual exchange rates posted inside their offices. The trick, FAS said, is to lure unsuspecting customers, who are then ripped off in a murky transaction. Acting on tips from customers, officials at the Moscow office of FAS last year checked the operations of some exchange offices belonging to the city’s credit institutions for compliance with antitrust legislation. The result was the prosecution of several banks, including the Investment Union Bank, Vityaz Commercial Bank and the Financial Standard Bank. Both the Vityaz and the Financial Standard Bank were found guilty of illegal practices and asked to pay 100,000 rubles in administrative fines, while the Investment Union, a second-time offender, was fined 300,000 rubles.

The present clampdown is at least in part the result of such activities. Andrei Kashevarov, the deputy head of FAS, told journalists in Sochi late last year that FAS has sent a formal request urging the Central Bank to protect customers from “unfair, improper and fraudulent practices at exchange offices,” adding that exchange offices routinely manipulate customers by displaying incorrect exchange rates on billboards outside their offices. “The Central Bank expressed readiness to straighten out that aspect of the rules governing how exchange points operate,” RIA Novosti quoted Kashevarov as saying. “Such a move should normalize the situation [at the exchange offices].” Kashevarov said his office has also requested the Central Bank to instruct exchange points to display full information about exchange rates and commissions on services not just inside their offices but on outdoor billboards as well.

Mikhail Sukhov, the director of the department of licensing and financial recovery of the Central Bank, told a recent meeting of bankers in Bora that the Central Bank would only allow banks that provide clients with a broad range of services to operate currency exchange points. The exchange offices that deal exclusively with the sale and conversion of foreign currencies will be proscribed. “They operate on a small scale but with a large volume of transactions and they interfere with normal banking operations,” Sukhov said, Vedomosti reported. “We will fight them and if need be, we will simply close them down.”

However, some experts have expressed doubts about the new fighting mood at the Central Bank, saying that the regulator-in-chief may have a hidden agenda. “This is a clear sign that the Central Bank wants the state to start collecting taxes on currency exchange operations,” Osadchy said. "These exchange points were not regulated for a long time and therefore they were able to avoid paying taxes to the state. By bringing them under the umbrella of certain commercial banks, they would become a cash-cow to the tax authorities." He added, however, that by eliminating competition from numerous exchange points, the Central Bank might be stimulating commercial banks to focus on the development of foreign exchange transactions, he said.

Even without the regulator wielding the axe, bank executives said the days of standalone exchange points are numbered. With the economy becoming much more civilized and more competitive, currency exchange offices – many of them a little more than no-frills roadside kiosks – are becoming a relic of the past thanks to new trends in banking technology. Many automated machines can now handle currency exchange operations, and, as they become more popular and more ubiquitous, there will be little room for co-existence in the currency exchange market.

Critics of the measure have argued that it would stifle competition in the currency market, leaving consumers with little or no choice. Osadchy said that commercial banks can hardly match the provision of easy-to-get exchange transactions which the exchange points had been providing. "Proscribing standalone exchange points could lead to the appearance of black market in currency because some people who need to exchange a lump sum as quickly as possible would hardly want to go through the rigorous form-filling and paper checking at the commercial banks," he said.

Yulia Bondaryova, director of the anti-monopoly service's financial oversight department, said that consumers must always be left with credible choices in all economic transactions. “There is one way to ensure that consumers are not overpaying for services – that is by giving them a choice,” Bondaryova said. “Competition will also keep charges and commissions on currency exchange services at an optimal level.” Bondaryova said exchange booths that are not breaking the law and not cheating customers should not have to suffer, adding that FAS will discuss the matter with the Central Bank both before October 1 and after, when the effects of the ban will be clearer. She said that a compromise must be found so that the booths' clients do not suffer, either. For example, banks could be required to have currency exchange windows at all branches that work with individuals.
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