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Russian economy, five years after sanctions

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Authored by Serban V.C. Enache via Hereticus Economicus:

The Duran’s Alex Christoforou and Editor-in-Chief Alexander Mercouris discuss the state of the Russian economy under Vladimir Putin, five years after the first sanctions were imposed on Russia for the accession of Crimea to the Russian Federation. Its monetary policy is discussed and contrasted with the negative rates in Western countries.

My comment: The Russian Central Bank is not immune from the same fallacious economic thinking we see in the West. Conventional wisdom says that high interest rates combat inflation, while low interest rates fuel it. Obviously, this mantra falls short when you apply it to our current reality. One country leader who gets it is Turkey’s president, who, like Trump, is pressing his own Central Bank head to relax borrowing costs. Higher interest rates are good for people who save in Treasury bonds, but what percentage of the population holds assets in the form of Russian Treasuries? Pension funds do require Government debt instruments in order to protect themselves against inflation; and Government debt is far safer than [private] commercial paper. Being cut off from foreign capital markets, there’s no reason to keep interest rates high, even with a banking sector left largely unregulated on the asset side.

As for the West, the fact investors are buying bonds which have negative yields means that the outlook on inflation is dismal and they still see this Government-issued instrument of saving as worthwhile. True, negative interest rates are a tax on the reserve accounts banks hold at the central bank. It’s a tax on bank liquidity. But there is no liquidity crisis in countries like Germany, the UK, and the US, and indeed there can’t be such a crisis, as long as their banking sectors meet their capital requirements. When bank assets shrink in value relative to bank liabilities, which are stable in value, this erodes their equity and makes it harder for them to borrow and can even lead to bankruptcy – unless the institutions in question are well-connected to the ruling class, in which case, the Central Bank and Treasury intervene with all sorts of bailout schemes. One reason as to why the Fed, the BoE, and the ECB adopted QE and near zero interest rate policy was in the logic that flooding the banks with reserves will revive lending. This move only makes sense in the fantasy world of mainstream economic thought – which preaches the fiction that banks lend out reserves to customers when they make loans. In reality, however, that doesn’t happen. Loans create deposits, while reserves are shuffled back and forth [as necessary] for legal accounting and settlement purposes only.

In July I wrote a piece on Russia’s macro picture, and pointed out why its budget surplus doesn’t put drag on the domestic private sector, due to the foreign sector’s large deficit against Russia [7 percent of Russia’s GDP in 2018]. With a budget surplus of 2.7 percent of GDP last year, that left Russia’s domestic private sector in a net financial surplus of 4.3 percent of GDP. The same situation is projected for this year.

On the question of affordable Government investment in public infrastructure and public services… it’s not about accruing financial savings before the Government can invest. After all, we’re talking about balance sheet statements [the Sovereign keeping a ledger in his own unit of account], not savings in actual physical materials. Russia has the technology, the skilled labor, and necessary materials to expand public services and physical infrastructure; and it doesn’t require foreign currency for any of this. For a country like Russia, a country with monetary sovereignty, there is never a “lack of its own money.” The challenge, or art of public finance, however, is to conduct fiscal policy in such a manner to accommodate investment, job creation, and income growth while keeping prices in check. So long as wages and profits are rising faster than prices, you achieve real growth, and that’s what matters.

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Daniel Christof

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