Greenlights Economic Nationalists Who Oppose Current Liberal
signs that Russia is planning to decouple itself from the US-centered
more than two years of worsening economic growth and an economy
struggling with 10.5% central bank interest rates that make new
credit to spur growth virtually impossible, Russian President
Vladimir Putin has finally broken an internal factional standoff.
July 25 he mandated that an economic group called the Stolypin Club
prepare their proposals to spur growth revival to be presented to the
government by the Fourth Quarter of this year. In doing so, Putin has
rejected two influential liberal or neo-liberal economic factions
that had brought Russia into a politically and economically dangerous
recession with their liberal Western free market ideology.
is a major development, one I had been expecting since I had the
possibility to exchange views this June in St. Petersburg at the
annual St. Petersburg International Economic Forum.
very little fanfare, Russian press a few days ago carried a note that
could have a most profound positive significance for the future of
the Russian domestic economy. The online Russian blog, Katheon,
carried the following short notice: “Russian President Vladimir
Putin instructed (the Stolypin economist group–w.e.) to finalize
the report of the Stolypin Club and on its basis to prepare a new
program of economic development, alternative to Kudrin’s
economic plan. The program itself should be given to the
Bureau of Economic Council in the IV quarter of 2016.”
their comment, Katheon notes the major significance of the decision
to drop the clearly destructive neo-liberal or free market approach
of former Finance Minister Alexei Kudrin: “The Stolypin club report
advises to increase the investment, pumping up the economy with money
from the state budget and by the issue of the Bank of Russia. In
turn, the concept of the Center for Strategic Research (Alexei
Kudrin) suggested that investments should be private and the state is
to ensure macroeconomic stability, low inflation, reduced
the current situation of severe Western economic and financial
sanctions against Russia the flows of such private investment into
the economy as the Kudrin camp advocates are rare, to put it gently.
Cutting what is a very minimal budget deficit only increases
unemployment and worsens the situation. President Putin has clearly
realized that that neo-liberal “experiment” has failed. More
likely, is that he was forced to let economic reality unfold under
the domination of the liberals to the point it was clear to all
internal factions that another road was urgently needed. Russia, like
every country, has opposing vested interests and now clearly the
neo-liberal bested interests are sufficiently discredited by the poor
performance of the Kudrin group that the President is able to move
decisively. In either case, the development around the Stolypin Group
is very positive for Russia.
convening the new meeting of the Economic Council Presidium on May
25, after a hiatus of two years, President Putin, noting that the
group deliberately consisted of opposing views, at that time stated,
“I propose today that we start with the growth sources for Russia’s
economy over the next decade…The current dynamic shows us that the
reserves and resources that served as driving forces for our economy
at the start of the 2000’s no longer produce the effects they used
to. I have said in the past, and want to stress this point again now,
economic growth does not get underway again all on its own. If we do
not find new growth sources, we will see GDP growth of around zero,
and then our possibilities in the social sector, national defense and
security, and in other areas, will be considerably lower than what is
needed for us to really develop the country and makeprogress.
just two months later, Putin obviously has decided. He clearly has an
eye as well to Russia’s next presidential elections in March 2018.
In doing so he has selected the one group of the three on the
Economic Council that believes that the state has a positive role to
play in development of the national economy.
Stolypin group in many ways harkens back to the genius behind the
German “economic miracle” after 1871, whose ideas created the
most impressive economic growth from backwardness in all Europe
within just over three decades. The only other countries to come near
to that German economic achievement were the United States after
1865, and the Peoples’ Republic of China after 1979, with the Deng
Xiaoping “Socialism with Chinese Characteristics.” The national
economic development model is based on the work of the
now-all-but-unknown 19th Century German national economist,
Friederich List, the developer of the basic model of national
the Shock Therapy years of Boris Yeltsin in the 1990’s, Harvard
economists like Jeffrey Sachs, financed by meta-plunderer George
Soros, advised Yeltsin. The disastrous policies of Yeltsin’s
economic team, then led by Yegor Gaidar, implemented wholesale
privatization of state assets at dirt-cheap prices to Western
investors like Soros. They made drastic state budget reduction, cuts
in living standards, elimination of old age pensions of the
population. All was done in the name of “free market reform.”
After that trauma, beginning with Putin’s first Presidency in 1999
Russia slowly began a painful recovery not because of the
Gaidar-Harvard shock therapy, but rather despite it, a tribute to the
determination of the Russian people.
astonishing as it might seem, those free market ideologues, followers
of the late Gaidar, until now have held a virtual monopoly over
policies of the Economics and Finance Ministries of Russia.
have been aided by the leader of a slightly different but equally
destructive monetarist camp, Central Bank of Russia Governor Elvira
Nabiullina who only seems obsessed with controlling inflation and
stabilizing the Ruble.
past May Putin gave the first sign that he was open to the idea that
the ever-reassuring reports of his finance and economic ministers
about how “recovery is just around the corner” (as Herbert Hoover
allegedly said at onset of America’s Great Depression in 1930) were
not right. The Russian President convened the Presidium of the
Economic Council, a group which had not met in two years, charging
them to come up with a plan to solve Russia’s economic problems.
The Presidium consisted of thirty five members representing each of
the three major economic camps.
neo-liberal Finance Minister Alexei Kudrin headed one camp backed by
Finance Minister Anton Siluanov and Economic Minister Alexey
Ilyukayev. This group demands the usual Western laissez-faire
remedies such as drastic reduction of the role of the state in the
economy via wholesale privatization of the railways, energy companies
like Gazprom, and other valuable assets. Kudrin was also named by
Putin to chair the newly-reorganized twenty-five-member economic
strategy group in May. Many national economists feared the worst at
his naming, namely a revival of Gaidar shock therapy, Mach II. That
now will clearly not happen. Kudrin and his approach have been
rejected as not effective.
second group was represented by central bank head, Elvira Nabiullina.
They were the most conservative, claiming that no reforms were needed
and that no economic stimulus was needed either. Just hold a steady
course under double-digit central bank interest rates and that will
somehow kill inflation and stabilize the Ruble, as if that was the
key to open the economic growth potential of Russia. It has instead
been the key to slowly kill the economy and increase inflation.
third group represented was the one most Western observers ridiculed
and dismissed, with the US Pentagon-linked Stratfor referring to them
as a “strange
have personally met and talked with them and they are hardly strange
to anyone with a clear moral mind.
is the group which after two months has emerged with the mandate from
Vladimir Putin to lay out their plans to boost growth again in
group is in essence followers of what the great almost-forgotten 19th
Century German economist, Friedrich List, would call “national
economy” strategies. List’s national economy historical-based
approach was in direct counter-position to the then-dominant British
Adam Smith free trade school.
views were increasingly integrated into the German Reich economic
strategy beginning under the Zollverein or German Customs Union in
1834, that unified one German internal domestic market. It created
the basis by the 1870’s for the most colossal emergence of Germany
as an economic rival exceeding Great Britain in every area by 1914.
third group, the Stolypin group in the May, 2016 meeting, included
Sergei Glazyev, and Boris Titov, co-chair of Business Russia, and
Russia’s “business ombudsmen” since the creation of that post
in 2012. Both Titov and Glazyev, an adviser to Putin on Ukraine and
other matters, are founding members of the Stolypin Club in Russia.
In 2012 Glazyev was named by Putin, then Prime Minister, to
coordinate the work of federal agencies in developing the Customs
Union of Belarus, Kazakhstan, and Russia, today the Eurasian Economic
Union. Titov, also the Leader of Right Cause party, is a successful
Russian entrepreneur who in recent years has turned to work advancing
various economic policies within the state, often in vocal opposition
to Kurdin’s free-market liberal ideas. Notably, Titov is also
co-chairman of the Russian-Chinese Business Council.
broad indication of the kind of proposals the Stolypin group will
propose to revive substantial economic growth in Russia and deal with
major basic infrastructure deficits that greatly hinder productive
enterprise came in a series of proposals Glazyev made in September
2015 to the Russian Security Council, a key advisory body to the
Glazyev proposed a five-year ‘road map’ to Russia’s economic
sovereignty and long-term growth. It was aimed toward building up the
country’s immunity to external shocks and foreign influence, and
ultimately, toward bringing Russia out of the periphery and into the
core of the global economic system. Goals included raising industrial
output by 30-35 percent over a five year period, creating a
socially-oriented ‘knowledge economy’ via the transfer of
substantial economic resources to education, health care and the
social sphere, the creation of instruments aimed at increasing
savings as a percent of GDP, and other initiatives, including a
transition to a sovereign monetary policy.
1990 the first priority of Washington and the IMF was to pressure
Yeltsin and the Duma to “privatize” the State Bank of Russia,
under a Constitutional amendment that mandated the new Central Bank
of Russia, like the Federal Reserve or European Central Bank, be a
purely monetarist entity whose only mandate is to control inflation
and stabilize the Ruble. In effect money creation in Russia was
removed from state sovereignty and tied to the US dollar.
2015 plan also proposed to use Central Bank resources to provide
targeted lending for businesses and industries by providing them with
low subsidized interest rates, between 1-4 percent, made possible by
quantitative easing to the tune of 20 trillion rubles over a five
year period. The program also suggested that the state support
private business through the creation of “reciprocal obligations”
for the purchase of products and services at agreed-upon prices.
well Glazyev proposed that the Ruble build up its strength as an
alternative to the de facto bankrupt dollar system by buying gold as
currency backing. He proposed that the Central Bank be mandated to
buy all gold production of Russian mines at a given price, in order
to increase the ruble gold backing. Russia today is the world’s
second largest gold
Russia’s President has realized that whatever impressive advances
Russia makes in the foreign policy area can be fatally undercut by a
failing economy, Russia’s Achilles Heel as I noted in an earlier
piece. The July 25 announcement by Putin has the potential to reverse
that if done with resolution on all levels. There the President has a
responsibility to clearly lay out their strategy over the coming five
years—by the way a very useful time frame to judge results having
nothing to do with old Soviet five-year plans, as France’s De
Gaulle understood as well.
giving the population a clear vision of their future, he can tap into
the remarkable Russian human resources to literally accomplish the
impossible in turning the economy into a genuine prosperity based on
sounder foundations than that of the monetarist laissez faire West
which today is de facto bankrupt.
external debt dynamics show that sanctions are losing their bite, as
Russian companies roll over their debts and increase their borrowings
in Western financial markets.
former Prime Minister Arseniy Yatsenyuk is currently touring European
capitals calling on the EU to maintain its sanctions against
Russia. This is in the face of what even Yatsenyuk admits
is growing opposition to sanctions in Europe and growing EU “Ukraine
is being little said is that the actual effectiveness of the
sanctions has already eroded significantly.
sectoral sanctions which the EU imposed in July 2014 – the
sanctions which matter – come in three groups: (1) a prohibition on
the supply of sophisticated technology to the Russian oil industry,
(2) limits on the sale of “dual use” technology (ie. technology
that can be used in military design and development), and (3) a ban
on borrowing by certain designated Russian banks and companies in
European financial markets via debt instruments of a period of more
than 30 days.
these sanctions only the third group of sanctions is important.
halving of oil prices since mid 2014 has rendered the first group of
sanctions essentially irrelevant since exploration and investment in
new oil fields everywhere in the world has basically come to a
stop. The Russians can in time anyway develop analogous
technologies for themselves.
same is also certainly true of so-called “dual use” technologies
covered by the second group of sanctions, which the Russians would
certainly anyway want to develop for themselves.
the first and second groups of sanctions ultimately rest on the
fallacy that Russia is a technologically primitive country. This
is a fallacy that has been repeatedly proved to be untrue but which
no amount of contrary evidence ever seems able to shake. As
it is what the first and second groups of sanctions actually do is
play into the hands of those in Russia who insist on the country
pursuing an import substitution policy.
contrast the third group of sanctions, the ones that limit borrowing
Russian banks and companies, has made a real difference. Not
only have Russian banks and companies been unable to raise additional
funding in the West but the sanctions have prevented them from
rolling over their existing external debt, obliging them to pay off
their debt more quickly.
the context of reduced cash flows caused by the fall in oil prices
that has undoubtedly led to investment being cut, and to greater
pressure on the rouble as Russian companies have been forced to
convert their rouble earnings into dollars and euros to pay foreign
is this third group of sanctions which however are now eroding way.
Central Bank has said that after falling rapidly in 2014 and 2015
from a peak of $733 billion in July 2014 to $518 billion in January
2016, aggregate Russian external debt increased from $518 billion in
January 2016 to $521 billion in July 2016. This despite
the fact that debt repayments for the whole of 2016 are in the order
of $67 billion, with March being the heaviest month for repayment.
fact that Russia’s aggregate foreign debt is now essentially stable
is probably down to two factors. Firstly, it is believed
that as much as half of the total debt repayments by Russian
corporates which are due in 2016 are repayments of ‘intra-group’
debts, where Russian firms borrow from closely-linked Russian owned
entities registered offshore for the purpose of tax efficiency.
‘debts’ obviously are not real debts at all and are not affected
by the sanctions, and can be easily rolled over, and it is likely
that most of them are. However it seems that there has
also been a small increase in actual borrowing by Russian companies,
some of it in the form of bonds.
this may indeed be the case, with foreign investors returning to the
Russian market, is suggested by figures the Central Bank has released
for Foreign Direct Investment (“FDI”) into Russia. Before
sanctions this was running as of 2014 at roughly $6 billion to $15
billion a quarter. It then fell to zero after sanctions
were imposed. However in the second quarter of 2016 FDI
was again $6 billion.
does not mean that the effect of the sanctions has entirely
ended. However they are not as heavy a burden on the
Russian economy as they once were.