Any proposals discussed by the Security Council of a major country with nuclear weapons, deserve to be analyzed, even if they are crazy.
The first impression to be had from the recommendations recently made by President Vladimir Putin's economic advisor Sergey Glazyev to Russia's Security Council is that they are indeed "crazy." If Russia adopted them, its economy would fall to a level somewhere close to Venezuela if not North Korea which would then have incalculable socio-economic repercussions.
Glazyev's plans derive from leftist economic ideology, Russia’s culture of bureaucracy and restrictive style of government. They offer the Russian economy a mix of disincentives, restrictions, and isolationist measures wrapped in a notion of “sovereignty” that the current Russian elite finds attractive. It is worth spelling out how dangerous they are, if only as an illustration of the kind of advice that is currently being offered at the highest levels of the Russian elite.
Senior Associate and DirectorEconomic Policy ProgramMoscow Center
According to media reports, in order to “stabilize the ruble exchange rate, stop capital flight, and de-dollarize the economy,” Glazyev proposes the following steps:
• prohibit legal entities from purchasing foreign currency “without a legal basis, such as payment transactions”;
• introduce a tax on currency exchange transactions and international payments;
• outlaw foreign currency loans to non-financial organizations;
• make the sale of foreign currency revenues mandatory.
Glazyev's notion that the ruble is unstable is misguided: it is actually stably linked to the price of oil, which is now much closer to its lowest credible rate than just a year ago. His prescriptions to achieve this questionable goal could have fatal consequences.
If legal entities are prohibited from buying foreign currency, their natural desire to hedge currency risks will force Russian banks to buy derivatives and increase the already high cost base of the Russian economy. They will be exposed to heavy risks. Any market shocks could bring down these banks, as happened with the banks that played with credit default swaps in 1998 and 2008.
A tax on currency exchange transactions would only raise the cost of virtually all goods (given Russia’s heavy reliance on imports) and decrease consumption in an already struggling economy.
A ban on foreign currency loans would put immense strain on banks, many of whose liabilities are denominated in foreign currency. Banks would need to make enormous efforts to hedge their foreign currency risks. Who would pick up the bill? Borrowers, account-holders and the budget.
In this environment, a new black market would spring up overnight as account-holders scrambled to find ways to keep their money in foreign currency, and the prices of a wide range of goods will shoot up, triggering stagflation.
Glazyev then makes the following recommendations on “stabilizing prices”—presumably to deal with all these negative effects.
• freeze prices on basic consumer goods;
• introduce a limit on the difference between producer prices and retail prices;
• empower the Federal Antimonopoly Service to unilaterally set prices for any goods in the event of “severe fluctuations.”
Measures like this have been tried—in Venezuela and North Korea, or back in the USSR for example. Freezing prices immediately creates acute shortages and a black market. Any local producers who are unwilling to break the law and deliver goods to the black market will cease production.
To combat the shortages, the government would need to introduce ration cards and state procurement and distribution of goods. However the state would soon have to purchase products from abroad to make up for shortages and falling production.
Yet to buy goods from abroad, the state needs the very same hard currency that Glazyev wants to ban. Thus, “to neutralize the effect of sanctions at the level of companies,” he proposes:
• declare "force majeure" and defend the right of Russian companies not to repay loans from creditors in countries that have imposed sanctions on Russia;
• convert dollar-denominated reserves into gold and securities of BRICS countries;
• establish an alternative to the SWIFT international payments system together with other BRICS countries.
The idea of an alternative to SWIFT can be swiftly dismissed: all BRICS countries trade so much more with the United States and the EU than with each other, that they are unlikely to share Russia’s desire for a new separate payment system.
As for the default—most of the loans taken out by Russian companies were the responsibility of their foreign holdings under the laws of other countries, allowing creditors to seize these companies’ assets regardless of any local Russian decisions.
As Russia faced ever-greater crisis, it would seek to convert dollar-denominated assets into gold and BRICS currencies. For now, Russia still has substantial reserves. But this process alone would cost Russia tens of billions of dollars—before we even talk about a possible devaluation of the BRICS currencies or a fall in the world price of gold.
It should therefore come as no surprise that the next item on Glazyev’s agenda is:
• create a mechanism to convert “strategic” insolvent enterprises into “public enterprises.”
“Public enterprises” are, presumably, state-controlled enterprises which raid state resources such as pension funds in order to finance themselves, or even benefit from the conversion of citizens’ bank deposits into equity or debt. This would threaten Russia's pension system (if it is still standing) and induce citizens to remove their bank savings and put them under their mattresses.
At this point, the Russian government would have no alternative but to follow Zimbabwe's example and simply print money. The government would be the sole remaining economic player, exporting natural resources in exchange for a bare minimum of imported goods its impoverished citizens would buy with their almost worthless rubles.
How did a report like Glazyev's, which defies common sense and the economic experience of the rest of the world, come to be submitted to an illustrious body like Russia's Security Council? If the council were seriously interested in Russia's economic development, it would not even consider it.
The true reason for the report may therefore not have much to do with economics.
Although we have no way of ascertaining the true purpose, it may make more sense to derive the report's stated purpose out of its declaration: “measures to overcome the negative impact of Western sanctions on the economy.” This is already a surprise, as in actual fact Western sanctions have had little impact on the fundamentals of the Russian economy. Restrictions on lending came at a time when Russian economic players had already strongly reduced their foreign borrowing due to a lack of investment opportunities and domestic demand. Western bans on technology transfers affect hard-to-recover oil and gas reserves whose production would be unprofitable in current circumstances. Targeted sanctions on individuals simply have no power to hurt the economy.
But the emphasis on sanctions may give a clue as to a political rationale behind the report.
There used to be a popular joke about President Boris Yeltsin and Stalin: "Yeltsin asks Stalin how to bring Russia out of its crisis. Stalin advises him to shoot all of members of parliament, shut down the free market and paint the Kremlin walls green. “Why green?” asks Yeltsin. “I see you have no problem with my first two proposals," Stalin responds.
In this vein, it may be that the authorities want to convince the public that the cause of Russia's stagflation is Western sanctions—hostile actions by Russia’s enemies. When Glazyev’s proposals are rejected, with or without debate, the government can claim to be moderate and liberal and divert the conversation away from any discussion of the real root causes of the economic crisis.
The alternative explanation is less benign. In recent years a large and highly-placed stratum has formed of Russian government officials and “partners of the regime,” who enrich themselves thanks to their control over the levers of the economy.
This powerful class has a pact with the Kremlin of exclusive rights in return for loyalty. They are constantly seeking ways of increasing their earning potential. Up until 2011-2012, these elite groups tried to keep some kind of balance between their need for quick enrichment and the future needs of the economy. One regional politician, quoting the Roman emperor Tiberius, unofficially described this approach as “Shear the sheep, but don’t slaughter them.”
If even a few of Glazyev's recommendations to the Security Council were enacted, these elite groups would enjoy almost unlimited but short term opportunities to enrich themselves by exploiting market shortages, tighter government control and monopolization of imports and exports. If this is so, it suggests that the elites have stopped thinking about the long term and now believe it is time to slaughter the sheep rather than shear them.
Whatever the true explanation for it is, Glazyev's report is confirmation of the sad truth that no one is discussing the real issue: how an outmoded and destructive economic model drove Russia into stagnation even when the oil price was above 100 dollars a barrel and there were no sanctions and no external enemy to blame.
Instead the current Russian leadership prefers to brainstorm leftist solutions to counter the supposed effect of sanctions. By doing so they avoid asking difficult questions, which would require even more uncomfortable answers.
16 bldg. 1 Tverskaya Street
Phone: +7 495 935-8904
Fax: +7 495 935-8906
Contact By Email
© 2017 All Rights Reserved
You are leaving the Carnegie–Tsinghua Center for Global Policy's website and entering another Carnegie global site.