NATO:
no fascists in Ukraine. Let's help NATO find fascists in Ukraine
Here
is the original propaganda piece from NATO
Sergei
Glaziev: stupidity is worse than theft
11
December, 2014
Dear
friends,
Today is my my privilege to submit to you the full
text of the recent article by Sergei Glaziev "Stupidity
Is Worse Then Theft"
originally published on the World Crisis
website:
http://worldcrisis.ru/crisis/1716266.
I
want to thank all those who participated in this difficult and long
translation: Alice, S, Gideon, Marina (translation) and D.M.
Pennington, Michael, Peter, Heather, Bernie, Patricia, Tom, Kristin
(editing). This is a crucial text which is made available to
the English-speaking world only thanks to the fantastic job of these
volunteers. Thank you guys!
Also, a reader of the
French Saker Blog named "DePassage" (merci!) has called our
community's attention to a most interesting analysis made by Jon
Hellevig the Awara
Group entitled
"Putin
2000 – 2014, Midterm Interim Results: Diversfication, Modernization
and the Role of the State in Russia’s economy"
which you can find on this
page http://www.awarablogs.com/putin-midterm-interim-results/ and
which I strongly urge you to read. It might give you a better
sense of where the Russian economy is, along with a few
surprises.
Clearly, until the combat operations resume (which
the most probably will), the "economic front" is the most
important one in the war against Russia and I will try to continue to
bring to you alternative top-quality information and analyses to try
to debunk the imperial media's narrative.
Cheers and kind
regards,
The Saker
-------Sergei
Glaziev: stupidity is worse than theft
Translation:
Alice, S, Gideon, Marina
Editing: D.M. Pennington, Michael,
Peter, Heather, Bernie, Patricia, Tom, Kristinhttp://worldcrisis.ru/crisis/1716266
Why
did the Central Bank raise the interest rate and let the ruble
flow?
Author:
Sergei Glazyev, academic RAS (Russian Academy of Sciences)
Another
increase in key interest rates on loans issued by the Bank of Russia,
for the purpose of refinancing commercial banks, made loans
completely inaccessible for the majority of enterprises of the real
sector of the economy. When the average profitability of the
manufacturing industry is 7.5-8%, credit issued at rates of 10% or
higher cannot be used by most businesses, either for investment or
for replenishing working capital. Such decisions cut off the real
economy, with the exception of some sectors of the oil, gas, and
chemical-metallurgical sector, from credit issued by the
State.
Prior to that, the consumer lending boom drove
millions of citizens into a 10-trillion ruble debt and the real
economy lost the savings of the population, becoming a net debtor.
Also, the Government withdrew pension savings from the economy.
Sanctions imposed by NATO countries deprive the economy of the bulk
of external credit. Most businesses have only their own funds to
finance working capital and investments, which is clearly not enough
to provide even simple reproduction, never mind an expanded one. The
amount of profit of enterprises this year (taking into account the
fall in the prices of export goods) will be no more than 10% of the
required rate of investment of 25-30% of GDP. It’s no surprise that
as a result of such decisions amidst the economic recovery in almost
all countries of the world this year, Russia is experiencing an
unexpected decline in investment and production.
According
to the Central Bank’s report, On
the key rate of the Bank of Russia, October 31, 2014,
its decision to raise interest rates was made because of external
circumstances: “In September-October the external environment has
changed significantly: oil prices dropped significantly while there
has been a tightening of sanctions imposed by individual countries to
a number of large Russian companies. The ruble has been weakening in
this environment, which, against the backdrop of August’s
restrictions on import of certain food products, led to a further
acceleration of growth of consumer prices”. To support its previous
decision to raise interest rates, the Central Bank argued that
“inflationary risks had increased, including rising geopolitical
tensions and their possible impact on the dynamics of the course of
the national currency, as well as changes in the tax and tariff
policy.” In the same policy statement, the Central Bank explained
its decision to raise interest rates by “a stronger than expected
effect of exchange rate dynamics on consumer prices, rising inflation
expectations, as well as the unfavorable trends in the market for
certain goods.”
This reasoning does not stand up to
criticism.
Any entrepreneur dealing with the real
economy and not with the utopian models of market equilibrium will
say that the increase in the interest rate leads to a rise in the
cost of credit. This leads to increased costs for the borrowing
enterprises and, consequently, to higher prices for their products.
Increasing percentage in excess of the rate of return on assets does
not make sense for financing investments, nor does excess of
profitability of manufactured products make sense for working
capital. It results in reduced production, which in return causes an
increase in cost per unit of production and a further increase in its
prices. The inability to get investment loans deprives businesses of
opportunities to reduce costs by increasing scale and technological
improvements of production, which shuts off the main ways of reducing
prices.
All of the above have been proven many times
theoretically and confirmed in practice. An increase in interest
rates and accompanying contraction of the money supply led to the
same consequences in all countries - the decline in investment and
production on the one hand and increased costs on the other. The
result was a dramatic bankruptcy of many enterprises faced with the
impossibility of refinancing their production processes. Today, just
as in the 1990s, this policy drives the economy into a stagflationary
trap and deprives it of development opportunities.
Apparently,
the heads of the Central Bank are guided by fantasies gleaned from
student textbooks on macroeconomics. In some of them, to facilitate
students’ understanding, market mechanisms are simplified to
primitive mathematical equilibrium models, which were brought to
economic science from classical mechanics almost a century ago. The
economy in these mechanistic models is presented as a set of economic
agents oriented towards maximizing profits, having perfect knowledge,
and working in conditions of perfect competition and instant
availability of any resource. According to these models, an increase
in the money supply, as with any other product, leads to lower
prices, which is equivalent to higher inflation. And vice versa, an
increase in the price of money (interest rates) entails reducing
their supply and falling inflation. On this basis, a favorite
monetarists’ Fisher identity (equation) postulates a direct
proportional relationship between money growth and prices. Despite
the fact that it is not statistically confirmed, the advocates of
this theory continue steadfastly to profess the dogma of a direct
linear relationship between money supply growth and inflation, and,
accordingly, the inverse relationship between inflation and the
interest rate. Amateurs, in their simplicity, seem to believe it’s
obvious and impose it on public opinion. It’s an equivalent of
trying to cure all diseases by bloodletting, a practice of medieval
doctors on trusting patients.
In reality, none of the
assumptions taken as an axiom in equilibrium models is being
observed. Being guided by them in economic policy is akin to building
socialism guided by the Communist Manifesto of Marx and Engels,
without taking into account the diversity of the people and
institutions built by them, without distinction of enterprises,
industries and technologies, and without mechanisms of development.
Such economic “theory” degenerates into scholasticism, unsuitable
for practical use. Therefore, none of the managers in developed
countries uses the equilibrium theory in practice. Instead, they are
guided by extracting profits in non-equilibrium situations and
developing an economy by its complexity. A mechanistic picture of the
equilibrium of the economy remains for amateurs; it is used to
convince them of the uselessness of government intervention in the
economy. This theory is being hammered with special tenacity into the
public consciousness of developing countries in order to deprive them
of the ability to creatively develop their institutions, which are
replaced with the “free market” forces and managed by developed
capitalist countries’ monopolies. Unfortunately, our monetary
authorities willingly adhere to this mythology without understanding
the basic meaning of how credit functions in a modern economy. This
meaning should be explained.
The birth of modern
capitalism is associated with the invention of public money as an
unlimited source of credit through the issue of national currency by
a special institution, the Central Bank. Currency issue is
essentially a mechanism to advance economic growth, and its use is in
both the private and public interest. In the first case, of which the
US Federal Reserve is an example, the money issue is subordinate to
the interests of the owners of the Central Bank, which receive huge
access to market manipulation. From the experience of financial
crises, these manipulations are undertaken by them to not only
receive income from the emission but also to appropriate national
wealth. By lowering interest rates and expanding the money supply,
the Central Bank stimulates the growth of production and investment.
By increasing interest rates, it provokes bankruptcy of companies
that are hooked on the cheap loans needle. The assets of these
companies are transferred to the banks that are close to the Central
Bank, which gives them unlimited access to the created loans.
When
the Central Bank is a state monopoly, as is the case in most
countries, its right to issue money can be used to ensure the
development and growth of the national economy by providing the
necessary amount of loans. This happens in Japan, China, India,
Brazil, the Eurozone, Iran, and Turkey. In other cases the right to
issue money may not be used if the country is not independent and
transfers control of its Central Bank to external management. This is
typical of many former colonies, the elite of which have their
interests closely linked to those of their colonial masters, who
still control their monetary policy.
In the postwar
period, many developing countries were caught in the debt trap when
trying to finance their development through external loans. Under the
threat of bankruptcy, they were forced to give up control over their
monetary policy to creditors, whose collective interests were
represented by the International Monetary Fund. These interests
mainly came down to the opening of the national economies to the free
flow of foreign capital; the requirements of which the monetary
policy was subordinated to. The latter include free convertibility of
the national currency, removing any restrictions on foreign
investment and outflow of capital, and the binding of the issue of
the national currency to the growth of foreign exchange reserves,
which were formed in the currencies of creditor countries. Thus the
economies of the debtor countries were subordinated to the interests
of capital of creditor countries, an absolute leader of which was the
United States, which imposed the use of the dollar as a world
currency in the capitalist world.
Russia, having taken
upon herself the external responsibilities of the Soviet Union, found
herself in precisely such a colonial state, caught in the debt trap.
Moreover, even though the Russian state has now paid off those debts
the Russian Central bank still subordinates itself to the interests
of International capital. As a result the fiscal authorities refuse
to implement capital controls, subordinating fiscal policy and
particularly the stimulation of the money supply to the growth of
foreign currency reserves and handing over the grading of credit risk
to the American rating agencies. These policies are justified by the
expectation that this will attract inward investment and that the
chief engine of economic growth is indeed such foreign
investment.
Actually, the expectation of an inflow of
foreign capital yielded the opposite outcome - colossal capital
flight. Russia became one the main net donors to the world financial
system, giving practically free credit to the USA and the other G7
economies cash reserves of almost 100 billion USD annually. As a
direct result of these policies serving international capital we see
the further degradation of an economy already based on low value-add
extractive industries whose production is sold again on the market
denominated in USD and Euros. Under such conditions foreign capital
extracts, as a result of these financial policies, enormous profits
which again artificially inflate the domestic financial markets.
It
is straightforward to evidence that for every dollar invested in
speculation on vouchers and securities issued as a result of the
privatisation carried out between 1993 and 1996 international
'investors' received up to five dollars in profit. The expansion of
speculation as a result of the State issued short term bonds (GKOs)
between 1996 and 1998 doubled that profit. International investors
then repatriated of that capital from Russia and the resultant
destabilisation of the financial markets led the state to default
which, in turn led to securities being devalued to a 10th of their
previous value. The International investors then returned and scooped
up those securities at fire-sale prices creating a new spike in the
market and, yet again doubling their capital and then, predictably,
withdrawing the lot just before the 2007 global financial crisis
struck.
It was in precisely this way that the
subordination of national fiscal policy to international capital gave
the international investors a return of two hundred dollars for ever
invested dollar. The vast majority of that profit was simply taken
out of the country. These profits were harvested from the state and
the Russian population. The share of that money which translated into
direct investment in productive industry or into tangible securities
was negligible.
It follows that the Russians who
collaborated with these 'investors' were not left out in the cold.
Many of them became genuine pioneers of the 'offshoring' of the
Russian Economy constituting themselves a new caste – The Offshore
Oligarchy. The temporary commission of the Russian Federation set up
to investigate the reasons, circumstances and consequences of the
1998 default were given evidence of direct collusion between the
representatives of international capital and an entire pantheon of
the 'great and the good' of both the Central Bank and the Russian
government. Some of those individuals to the present day, regardless
of the recommendations of the federal council, still occupy
influential posts within the state. I quote “To ensure that persons
involved in the preparation and decision-making of 17 August, could
no longer hold any position or in the public service or in
organizations where there is state ownership”
During
the 2008 financial crisis the Russian Oligarchy, having by now
mastered the methods of the earlier foreign investors began to
interfere with the money supply themselves. Having now paid external
debts, the Russian financial authorities no longer needed to
subordinate themselves to the IMF or to their masters in the United
States. Under pressure from crisis-driven capital flight they started
to stimulate the money supply with no further regard to pegging it to
hard currency reserves. However this was not done with the aim of
stabilising industry, shrunk by the crisis by around 5 to 40% but
rather to enrich a group of privileged commercial banks. They
directed that expanded, tax and interest-free money supply straight
to the financial markets extracting 300 Billion Rubles (12 Billion
USD) of profit again, with the cost being borne by the devaluation of
domestic savers' holdings.
And today the majority of the
cash issued by the Russian Central Bank to refinance the commercial
banks has been used for pure speculation which contradicts the policy
aims of the central bank itself. It is clear that by increasing the
interest rate while adopting a free floating currency rate, the
central bank, on one hand is blocking the inflow of credits to the
industrial sector and on the other is enabling the extraction of
super-profits from speculation against the Ruble. Its precisely by
doing this that a speculative vortex has been created where the
savings of the population are (yet again) converted into super
profits in speculators' bank accounts not to mention the equities of
Russian corporations which, when unable to pay the spiralling
interest rates thus created are more fodder for the hard currency
speculators pillaging the market from their offshore accounts.
In
this way the “holy Simplicity” of the managers of the central
bank, these unquestioning believers in the inconvertible truth of the
mechanical representation of the world given to them by the laws of
economic equilibrium, but not innocent rather subordinated to
transnational capital, of which the Russian offshore forms a part. It
is entirely plausible that being true believers in the Washington
Consensus, they not know not what they do. However their activities
are highly regarded by the academic priesthood in the American
universities. In the not-to-distant future those finance ministers
and central bank representatives will again be singled out for praise
as “best practice” just like their predecessors in earlier years.
“Best practice” in the sense that they have created the most
efficient conditions for the legal enrichment of the “oligarchic
international” on the backs of the wealth of our country and its
citizens.
The escalating crisis that we see today in
more than one way, reminds us of the situation which prevailed in
1997. Now, as then the government decided to sharply decrease export
duties which removed significant resources from the budget.
International capital began to move out. Now as then, instead of
instituting capital controls, interest rates were raised leading to
capital contraction on the financial markets. As a result, then as
now, there was no incentive to provide credit to the industrial
sector and the rate of investment in industry began to fall.
The
main difference is that the budget is in surplus and there is no
state debt (this is made up for by similar amounts of corporate debt)
and decision not to maintain a stable ruble is made in the presence
of large foreign exchange reserves. In summary, default does not
threaten the state but the same cannot be said of corporate
borrowers.
Given that there is far more stability than
in 1997, the fiscal authorities are actually themselves the greatest
threat provoking a collapse in business activity and destabilising
the currency. However this will not avert crisis, simply prolonging
it to the delight of the offshore oligarchy who can now, without risk
and at their leisure plan their speculation. It is inevitable that
the consequences of these policies will be a fall in the rate of
industrial activity and investment, a fall in profits and a stream of
bankrupt corporations and thus the subsequent and successive
devaluation of the population's savings.
This fiscal
policy is taking place in the background of a sustained global trend
towards stagflation which manifests as a volatile ruble and high
inflation on one hand coupled with a fall in the rate of investment
and economic activity on the other. The trigger for this crisis was
the imposition of economic sanctions. On one hand this materialised
in the refusal by western creditors to renew / rollover loans made to
Russian corporations and the collapse of foreign investment. On the
other side we see acceleration in already unprecedented capital
flight. The volume of which, in the current year, is expected to
exceed 100 billion USD. Incorporated into this is tax evasion which,
comprising up to one third of this amount, represents a direct loss
to the state budget of up to one trillion rubles
annually.
Currently more than 50% of the fiscal base
created by external credit and through offshore accounts comprises
between 30% and 40% of the non-state investment. The aggregate
external debt of Russia stands at 650 billion USD (74% of which is
denominated in Euro or Dollars), which exceeds the currency reserves
standing at 420 Billion USD. The majority of this debt at over 60% is
owed by state owned corporations and banks. In fact the majority of
external debts are from countries residing under the jurisdiction of
the NATO member states. The sanctions imposed by them lead to a
capital outflow of 11000 billion rubles to the end of 2014. The
intensification of sanctions could lead to the blockade of Russian
capital from offshore zones, through which flow over 50 billion USD
yearly in investment.
As a result of the ruble
destabilisation we shall see the 'dollarization' of the population's
savings which in turn will become another form of capital flight
which already amounts, through this means alone 30 billion
USD.
Regardless of the US imposed war on Russia, our
central bank continues to treat the US Dollar as the reserve
currency, referring to it as the definition of value, the means of
capital accumulation and the base rate for FX trading. The central
banks current politics envision the dollar being utilised as a
parallel, de-facto base currency in which the foreign currency
reserves, external trade debts and credits are denominated and to
which the ruble is effectively a subordinate currency. These policies
clearly resemble those inflicted by the 3rd Reich on the Soviet
territory occupied by them during the 2nd World War.
The
Central Bank does not take any measures either to stop capital
outflows, or to replace ebbing external sources of loans with
internal ones. Though the U.S. has waged a financial war against
Russia, the Bank is still governed by the Washington consensus, which
develops macroeconomic policy in favor of foreign capital. This
exacerbates the impact of sanctions in manifold ways, whereas it
could be neutralized by simple measures of currency control combined
with amplifying internal sources of credit.
The latter
is exactly what Mr Gerashchenko Victor V. [ex-chairman of the Russian
Central Bank] did in order to pull the country out of the 1998
crisis. Having pegged the currency position of commercial banks and
refused the IMF-initiated rise in interest rate, the Bank of Russia
was able to increase the money supply. Contrary to what the Central
Bank’s managers thought, this did not cause a rise but in fact a
swift fall in inflation accompanied by an upsurge in production and
stabilization of the value of the ruble. Today the Central Bank is
doing the opposite and the results are as expected: a fall in
production, the ruble’s depreciation, and the growth of
inflation.
Loans allocated by the Bank of Russia to the
banking system offset neither capital withdrawn by western creditors
nor money transferred by the Government to stabilization funds. This
causes the monetary base to shrink and consequently results in credit
crunch and slumps in investment and production. So far, the
Government has taken money out of productive industry, having
withdrawn 7 trillion rubles into reserve funds. At the same time, the
Central Bank has provided 5 trillion rubles in loans to the banks,
which then use these loans for monetary and financial speculation. In
this way, the monetary authorities pump money from the productive
industrial sector into the financial sector, reducing its supply. By
the end of the next year, if the Central Bank’s policy is not
changed, the external loan freeze will lead to a monetary base
squeeze of 15-10 %. This in turn will cause spasmodic contraction of
the money supply, investment fall-off by more than 5 %, and
production decline of 3-4 %. The reduction of money supply poses the
threat of a 2007-2008-like crash of the finance market. The capital
outflow may provoke defaults in many lending entities, and the number
of defaults might become overwhelming.
The policy of
increasing the refinancing rate set by the Central Bank results in a
rise in the cost of credit, and secures a tendency to shrink the
money supply and worsen the deficit in addition to the aforementioned
negative consequences. For all that, inflation does not decrease, due
to the ongoing influence of non-monetary factors, increased losses
due to the rise in the cost of credit, production decline, and ruble
devaluation. Since credit is inaccessible, currency devaluation has
no net positive effect on export expansion and import substitution.
Due to the worsened conditions for capital growth, money continues to
be exported, despite the increase in interest rates. The economy is
artificially sucked into a whirlpool of dropping supply and demand,
and sagging incomes and investments. Attempting to hold onto budget
gains by increasing taxes exacerbates the capital outflow and decline
in business activity.
Forcing the economy into this
stagnation trap happens solely due to monetary and loan policy.
Meanwhile there are available production capacities that are only
30-80 % employed, part-time idleness, savings exceeding investments,
and an excess of raw materials. The economy, which continues to be a
donor to the world financial system, uses just 2/3 of its potential
capacity.
To exit this stagnation trap it is necessary
to halt the “capital outflow – money supply reduction – demand
drop and credit crunch – rise in costs - inflation growth -
production and investment decline” spiral. To do so, simultaneous
measures to stop capital outflow, to stabilize macroeconomic
situation, to de-offshore the economy, and to create mechanisms to
nourish economic growth from internal sources must be taken.In
order to stop capital outflow it
is critical, first, to burden cross-border transactions so that their
illicit gains are offset, second, to cut speculative operations meant
to destabilize the currency and finance markets, and third, to close
off the channels of internal flow of capital into accounts in foreign
currency.
The first task can be performed by introducing
a tax on capital outflow at the rate of the VAT imposed on cashless
cross-border transactions in foreign currency. In the event the
legality of those transactions is confirmed (delivery of imported
goods, service rendition, confirmation of interest payments and
cancellation of loans, dividends and other legal returns on invested
capital), the VAT is refunded. In this manner, only the illegal,
tax-dodging outflow of capital will be subject to taxation. Whilst
the tax is being introduced, the Central Bank can call for
reservation of the potential tax money for all suspicious
cross-border operations for up to a year or until their legality is
confirmed.
In addition, the VAT should be reimbursed to
exporters only after submission of export earnings. A penalty must be
imposed for overdue debit debt under importation contracts,
non-reporting of export earnings and other types of capital export in
its full amount. It is essential to stop including non-residents´
distressed debts owed to Russian enterprises into non-operational
expenses (and thus decrease assessable income). Claims must also be
filed to indemnify an entity or state for losses against managers, if
such debts are reported.
To restrain illicit capital
export accompanied by tax evasion, a unified information system of
currency and tax control must be created, including electronic
declaration of operation IDs and insertion of these IDs into
databases of currency and tax monitoring institutions. Rules must be
introduced to determine the responsibility of the entities´ managers
in cases where there is an accumulation of overdue debit debts
related to export and import operations.
To stem cash
export, a rational limit must be set, which, if hit, signals capital
export operations (e.g., 1 million rubles, a sum obviously greater
than gastarbeiters’ combined wages, tourism expenses, and other
day-to-day operations). The export of foreign cash in an amount
exceeding 1 million rubles shall then be taxed (tax on capital
outflow).Transparency
of cross-border transactions for
tax and currency control must be achieved. Following the example of
America, agreements with foreign countries must be concluded in which
tax information is exchanged and foreign banks register and share
information concerning all global transactions involving Russian
Banks’ money. At the same time, Russian beneficiaries must be
responsible for declaration and taxation of their foreign accounts,
assets, and operations in conformity with Russian laws.To
separate legal and illegal export of capital, the
Central Bank should require licensing of capital export operations in
foreign currency. This should include in-advance notification of
capital export, increased regulation of operations in foreign
currency by Russian banks, and a limit on the scaling-up of the
currency positions of commercial banks.
To avoid
excessive losses, restrictions should be placed on the amount of
foreign off-balance sheet assets and valuables, including U.S.
treasury bonds and securities having large budget deficits or high
national debt.To
stop internal capital outflow,
opening deposit accounts in foreign currency or depositing the money
into previously-opened accounts should be banned. The system of
safeguarding citizens’ bank deposits should be confined to deposits
in rubles. These measures are necessary because the state cannot
secure preservation of valuables denominated in foreign currency
while there is a financial war against Russia. At any moment, they
could be devalued or frozen due to enemy activities or for other
reasons beyond Russia’s influence.
Currency control
should encompass not only bank operations, but all financial
operations including those involving insurance, which can be used to
export capital and evade taxes. It is necessary to at least stop
making insurance agreements in foreign currency. In addition, the
monopoly wielded by the City of London on reinsurance operations,
through which much income is exported, must be abolished. Experience
shows that, if a party asserts force majeure, it is idle to expect
foreign companies to meet their insurance obligations. The most
efficient and sustainable solution is to establish a state monopoly
on reinsurance, which could be allotted, for example, to the Export
Insurance Agency of Russia.
Generally, during financial
war regulators must deem transactions performed in rubles more
reliable than those conducted in foreign currency. At the same time
transactions in the currencies of the belligerent countries (which
imposed sanctions against Russia) should be considered the most risky
ones. In view of this, the Central Bank should establish higher
reserve requirements and standards of evaluation of risks involved in
bank operations in foreign currency vs. those made in rubles.In
order to de-dollarize the economy and
to insulate the currency and financial system of the country from
speculative attacks, it makes sense to levy a 5% tax on the purchase
of foreign currency or bonds denominated in foreign
currency.
Aforementioned measures to regulate
cross-border transactions should be applied exclusively to
foreign-currency transactions. Up until the 2007 financial crisis,
the lack of such operations did not have a great impact on
macroeconomic stability due to a more robust trade-surplus growth,
which was greater than a non-trade deficit. Although the Russian
financial system suffered big losses, the foreign currency reserves
grew and secured the strength of the ruble. But as capital is
exported and corporations’ and banks’ external debt went up, the
risk of destabilization of the finance and currency system appeared.
This risk was manifested in a 1.5-fold reduction in the ruble’s
value and a three-fold stock market crash, along with the loss of the
2007-2008 reserves worth $200-billion dollars.
In the
near future, the same thing, but on a larger scale, might take
place.
Unlike the export of foreign-currency assets, the
export of ruble assets does not create a direct threat of
macroeconomic destabilization provided the above-mentioned measures
of currency control are in place. There is, of course, the risk that
an avalanche of foreign-accumulated rubles could flood the internal
market causing inflation and/or strengthening of the national
currency beyond the equilibrium level. However, applying the above
measures to discourage speculations against the ruble creates a
fairly high and essentially insurmountable barrier against
speculators when there are sufficient currency reserves.
At
the same time, ruble export of rubles implies that the profit
accruing to the currency issuer (seigniorage) remains in Russia´s
financial system where it can be used to multiply investments, to
boost imports of vital commodities and services and to expand
reserves. Within certain bounds, building up capacities of the
financial system, decreasing foreign transaction costs and increasing
competitive edges are beneficial to the national economy. Making the
ruble the reserve currency is indispensable to ensuring the stability
of the Eurasian integration. This is why it is necessary to withdraw
from imposing restraints on cross-border ruble operations, create
conditions for recognition of the ruble as a reserve currency by
money authorities in other countries, and stimulate the import and
export paid for in rubles.
To widen the demand for
rubles and thus impart more stability to the national currency and
finance system, switching to mutual payments in rubles within the CIS
must be encouraged and also when arranging payments with the EU –
in rubles and euros, and with China – in rubles and yuans. It is
appropriate to recommend business entities to settle payments for
exported and imported goods and services in rubles. Herewith it is
necessary to provide for allocation of tied rouble loans meant for
the countries that import Russian commodities, in order to maintain
the commodity circulation, and also to use the currency-linked credit
swaps.
It is of the utmost importance to expand the
settlement system in national currencies between establishments of
the CIS states through the CIS´ Interstatebank or through
Russia-controlled international financial organizations (IBEC
[International Bank of Economic Cooperation], MIB [Moscow Industrial
Bank], Eurasian Bank of Development [EABD] and others). It would make
sense to create a payment and settlement system in the national
currencies of the EurAsEC [Eurasian Economic Community] members,
develop and deploy internal independent system of international
payments, having included Russian banks, those of the Customs Union
and CIS member states as well as those of Chinese, Iranian, Indian,
Syrian, Venezuelan and other traditional partners.
These
measures will create all necessary conditions protect the value of
the ruble and the financial market to external threats. Therewith,
the internal threats related to migration of the money supply into
the currency market persist. Although this threat became apparent in
the 90s, when rubles were emitted to provide agriculture and other
branches of non-financial sector of economy with loans and these
rubles then migrated into speculation in the currency market. It
revealed itself in 2008 as well: 2-trillion rubles emitted for
anti-crisis purposes went into currency market speculation and this
depreciated savings once again. The monetary authorities keep
disregarding this threat and do so despite the fact that, while the
Central Bank amplifies the refinancing of commercial banks, capital
export grows. This leads us to assume that commercial banks use most
of the loans received from the Central Bank to speculate against the
ruble in the global currency market.
In
order to stabilize the currency and finance market,
it is necessary to stop inflating the finance and currency market by
emitting rubles. It does not mean that the Bank of Russia should
cease refinancing commercial banks. Quite the opposite; to overcome
the recession and ensure economic growth, refinancing should be
stepped up. But it should be done cleverly, imposing liabilities on
banks which resort to refinancing for illegitimate ends. In
particular, the receipt of a loan from the Bank of Russia might only
happen on the condition that commercial banks assume responsibility
to properly use the credit, excluding the possibility of banks using
loans for speculation. To control the fulfillment of this liability,
the currency position of commercial banks could be fixed, special
accounts used, the bank margin restricted, and project financing
tools applied.
The Central Bank could considerably
enlarge and extend refinancing operations for banks that consent to
the Central Bank’s monitoring of loan use. And the Central Bank
should preferably do so on security of bills receivable of end-use
borrowers, which exclusively should be manufacturing enterprises,
than upon sale and repurchase agreements. The manufacturing
enterprises should be monitored by lending banks in order to see
whether the loans are properly used, solely to replenish the current
capital or investments into core assets. Considering that either
company can carry out a vast range of financial operations, including
the speculative ones (among them those of capital export), there are
good reasons to bring the standards of maximum allowed ratio between
credit and debit debt on all legal bodies and to limit financial
leverage to no greater than double value the principle.
The
very mechanism of refinancing commercial banks should be varied to
comply with objective needs for credit. Refinancing service for loans
made to manufacturing enterprises should be rendered at interest rate
of less than 4%, with bank margin reduced to 1%, so that
manufacturing enterprises could take out a loan at a rate that does
not exceed their profitability; for other purposes, at current rate
according to financial market.
The above measures are
about monitoring the offer rate of the ruble and designed to limit
demand for foreign currency, purely in order to pay for imported
commodities and services, pay interests on external loans and
recompense other legal operations. It is obvious that measures to
ensure stable offering of sufficient currency are required for stable
ruble value. More specifically, it makes sense to reestablish
obligatory sale of currency earning by exporters.
After
taking the above measures to block rampant speculation, the ruble
value could be taken under control. To stop speculation in foreign
exchange, it is possible to temporarily fix the exchange rate of the
ruble with a value lower than the market one, then to purposefully
adjust it without warning. The market insiders will therefore have to
consider the balance of payment and optimization of a balance between
the need for import and the need for maintaining the competitiveness
of national commodity prices. International experience convincingly
shows that, when stabilizing, discrete modification of the value of a
national currency is better that the floating one, because it halts
speculative eddies.
Applying the specified macroeconomic
stabilization measures creates conditions for resolving the issue of
replacement of external loan sources with internal ones without the
risk of starting the inflation.In
order to prevent bankruptcy of backbone companies,
it is necessary to replace external loans taken out by Russian
corporations with Russian banks’ loans. For this the Central Bank
must conduct well-aimed emission of credit resources and supply them
to companies on the same conditions as external creditors do. Taking
into account the scale of this task (credits subject to cancelation
before the end of the next year are worth $180-billion), it needs to
be completed only through state-controlled lending institutions.
Their managers must bear personal responsibility for appropriate use
of credits allocated to specified corporations so that they could
meet their obligations to external creditors.In
order to prevent commercial banks’ default on external bonds,
those banks should undergo stress tests, while the Central Bank, if
needed, allocates stabilization loans to them on terms equal to those
of external borrowings.
A special problem is presented
by the need to replace the foreign loans which Russian enterprises
obtained from European development institutions in order to pay for
new equipment. In particular, to prevent
the termination of equipment leases financed by foreign lenders,
credit facilities must be issued to fund [new] development
institutions that would operate in a similar way, using the funds
allocated to them for that same purpose. In each case we have to
consider, in parallel, whether domestic products could be substituted
for foreign imports. Even if they cost more and are inferior in
quality, ultimately this approach may be more advantageous, as it
reduces the risks, expands the revenue base and opens the way to
modernization and growth. We should also stop using state credit
resources to lease foreign technology.The
de-offshorization of the economy should
begin with the selection of those business activities that are most
vulnerable to the corrupt practices that tend to go hand in hand with
the use of offshore tax havens. For this, it makes sense to introduce
a legal definition of the term “national company” – a company
registered in Russia and having no affiliation with foreign entities
and jurisdictions. Only such companies should be given access to
mineral resources, state subsidies, and to work that is strategically
important for the state.
The ultimate owners of shares
in Russia’s strategic enterprises should be required to step out of
the shadows off-shore and register their ownership in the Russian
registers. There has been talk, for a long time now, about the need
to follow the example of developed countries by concluding agreements
covering the exchange of tax information with offshore tax havens and
doing away with existing agreements on avoidance of double taxation,
including with Cyprus and Luxembourg, which are known to be offshore
transit points. We need to define a uniform list of offshore
companies, including those that are part of onshore companies.
Transferring assets to offshore jurisdictions that shy away from such
agreements must be prohibited.
In addition, we need to
require offshore companies owned by Russian residents to abide by
Russian legislative provisions on furnishing information about the
members of the company, as well as on the disclosure, for tax
purposes in Russia, of tax information on all income received from
Russian sources, under threat of establishing a 30% tax on all
transactions with those who are “un-cooperative”.
Implementing
the above measures will create the conditions necessary for the
extension of credit without the risk of a flood of money being issued
and returned to the currency and financial markets from offshore for
speculative purposes. After these measures are adopted, the
non-inflationary expansion of the money supply becomes possible along
with the re-monetization of the economy in order to increase
investment and business activity.
The current decline in
production is mainly caused by a contraction in the money supply,
deteriorating credit conditions, and the destabilization of the
currency and financial markets which resulted in the flight of
capital and a drop in investment activity. To stop the downward trend
in investment activity, we have to give businesses the opportunity to
increase their working capital to allow for the optimal utilization
of existing production facilities.
As explained above,
we need to establish channels for the unlimited refinancing of
commercial banks by the Russian Central Bank, secured by
manufacturing companies with the credit already granted requirements
to production companies already issued credits at a rate not higher
than the average profitability of the manufacturing industry, with
the mandatory condition that the credit resources be provided
exclusively to manufacturing enterprises, with bank margins limited
to 1%. This will result in the changing the credit market from a
buyer’s market, where banks enjoy the advantage of a monopoly and
business-borrowers have to take loans at usurious rates, into a
seller’s market, in which banks will have to compete for customers.
This will give solvent manufacturers access to credit on the same
terms their competitors see in the West and in the East.
Providing
a way to finance working capital will put an end to declining
production and will ensure growth at existing facilities. In this way
the output of the manufacturing industry, construction and
agriculture will be increased by 10–15% within two years.
If
we take extra steps toward import substitution, the returns will be
commensurate. This would require establishing a lending mechanism
earmarked for projects to expand existing production facilities and
to create new ones based on the existing technological base. The
relevant sectors and agencies need to work actively to prepare and
evaluate the proposed import substitution projects. Projects that are
selected as promising should receive guarantees from the government
or federal agencies in order to attract loans from development
institutions and commercial banks, which would subsequently be
refinanced by the Bank of Russia at a rate of 2%, while bank margins
are limited to 1%.
Productivity growth and import
substitution will provide economic growth in the next 3 to 4 years.
Sustainable growth in the future requires long-term investment in the
modernization of existing production facilities. This means creating
a means for the Bank of Russia to refinance commercial banks, through
loans secured by bonds and shares in strategic enterprises, at a rate
no higher than the average return on shares in the manufacturing
industry, while holding the commercial banks liable for the proper
use of the credit received. The principles of project financing must
be applied broadly.
To achieve rapid development, we
need a sharp increase in R & D and investment in the development
of promising new technologies, which form the material and
technological basis for a long new wave of economic growth. At
present, the institutions supporting innovation are patently unable
to cope with the task. In order to increase investment in the
creation of new industries and the development of new technologies,
channels must be established for the refinancing of development banks
and state-controlled commercial banks by the Bank of Russia, with the
right to claim 2% of the assets generated per annum and on the
condition that the credit facilities are used in accordance with the
principles of project financing with a margin of no more than 1%. In
order to expand the means of financing development institutions, it
is desirable that the budget line for their funding be supplemented
with a mechanism for refinancing by the Bank of Russia at 2% per
annum for the purpose of project financing, secured by the assets
thus created.
Along with creating mechanisms for greater
lending and for investment in general, special lending institutions
should be designed to encourage large scale expansion of those
industries that show low profitability. These include strongly
seasonal industries, where the turnover cycle is not less than a year
(agriculture, resorts and recreational services) and industries with
a long production cycle (machine building, construction) lasting more
than 3 years. For companies in these sectors, there should be
mechanisms for subsidizing interest rates through specialized credit
institutions, some of which are already in place. These funds could
come from stabilization funds accumulated by the government out of
oil and gas revenues. In this case, the Reserve Fund should be
converted into a development budget, whose funds should be spent to
encourage investment in promising areas of economic growth by funding
development institutions. To do this, the capital accumulated in the
Reserve Fund should be placed in development institutions, bonds of
state-owned corporations, and in infrastructure bonds.
To
start on the path of accelerated development requires a multipronged
expansion of financing for innovation and investment projects. But
this will make sense only if responsibility for their effective
implementation is radically increased. This means we should make a
transition to our own domestic way of evaluating a project’s
economic worth. In particular, to reduce systemic risks, we must
replace foreign credit rating agencies, and auditing and consulting
companies with Russian ones for every step involved in investment
decision-making by public authorities and by banks that are partly
state owned. In addition, to make the investments more efficient, a
system needs to be created for evaluating and selecting the priority
areas for scientific-technical and economic development within the
framework set by the strategic planning system.
The
implementation of such a comprehensive system of measures to stop
capital flight and make the transition from foreign to domestic
sources of credit, with the simultaneous de-offshorization of the
economy, makes it possible to pursue a policy of rapid development on
the basis of a multi-faceted increase in investment and innovation,
in key areas of building a new technological foundation. The
re-monetization of the economy by having the state boost the lending
capacity of the banking system, and the return from offshore tax
havens of the capital that has been taken out, will enable us in the
next 2 years to see annual GDP growth of 6–8% per year, while
investment increases by 15% per year, and R & D spending by 20%
per year, all while keeping inflation in the single digits.
1
Report of the Interim Commission of the Federation Council to
investigate the causes, circumstances and consequences of the
decision of the Government of the Russian Federation and the Central
Bank of the Russian Federation, dated 17 August 1998, on the
restructuring of short-term obligations, the devaluation of the ruble
exchange rate, and a moratorium on executing capital foreign exchange
operations.
11.12.2014
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