The adviser to Russian President Putin proposes an alternative to the current monetary-and-credit policy of the Russian Central Bank.
Rustem Falyahov talks to Academic, Sergey Glazev. Appeared in Bulgarian at A-specto, translated by Valentina Tzoneva exclusively for SouthFront
The Central Bank (CB) must guarantee a stable exchange rate of the rouble against the dollar; reduce the margin of the banks and the interest rate to the level of the average yield in the real sector of the economy. This proposal is the foundation for a conceptual project for an alternative monetary-and-credit policy of Academic, Sergey Glazev, Adviser to Russian President, Vladimir Putin.
The monetary-and-credit-policy (MCP) is the founding document of the CB, defining its working policy. Glazev is convinced that this strategy is now vague and pursues goals which contradict the interests of society. It is necessary to create “internal sources for financing economic growth” under the conditions of sanctions and external shocks. These sources must not depend on the price of energy on the foreign markets as they do now.
Apart from that, in the conditions of economic crisis, the CB should not only focus on measures reducing the inflation rate (to 4% by 2017); it must stimulate economic growth by expanding production. “The regulator must not limit itself to fighting inflation without linking it to equally-important economic and financial indicators of development in the country,” Glazev pointed out in his 34-page project and highlighted that the return of the economy to growth is possible if several conditions are met.
The rouble is undervalued, just like in 1998.
The first point in Glazev’s proposal is to guarantee a steady exchange rate of the rouble. At the moment, it is extremely necessary to maintain stability in the currency market. Russia does not need a weak rouble. The weak rouble “increases the resources profile of the economy, increases the mistrust of the national currency, stimulates the leak of capital and accelerates inflation.”
According to the Constitution of the Russian Federation, “the major function of the CB is to protect and guarantee the stability of the rouble.” Stability can be improved if we learn how to form financial flows on the basis of internal sources “in other words, the monetary base of the rouble must be formed on internal factors and it must not depend on external economic conjuncture and the dynamics of prices of energy.” The rate of the rouble must respond to the level of competitiveness of the Russian economy. To achieve this, it is necessary to get out of the regime of ”a free-flowing rate of exchange of the rouble.”
Glazev pointed out that out of the 20 countries where the share of petrol export takes more than 70%, apart from Russia, there is only a regime of a free-flowing rate of exchange in Norway. The other countries apply a regime of a fixed or regulated exchange rate. Apart from that, to limit the possibilities of increased speculative deals, the regulator is obliged to use a broad set of tools. Related to the banks, the volume of currency speculation could be limited with tools, such as a lower currency position, lower norms of reserves in rouble operations and the introduction of turnover tax on the currency operations proposed by Tobin mostly in the Moscow Stock Exchange (Nobel laureate James Tobin – (1918-2002) proposed taxation on cash currency exchange.)
Even at a minimum of 1%, the introduction of such taxation will bring to the budget about a trillion roubles per quarter and could become an alternative for the privatisation of state companies.
The weak rouble made the Russian economy export-orientated and the export became super-efficient. “This disbalance is in the foundation of the dollarisation of the Russian economy, making the purchase of the rouble and rouble actives by the holders of dollars super-effective. In fact, we have come back to the parameter of undervaluing the rouble to the purchasing power parity (PPP) level, which was observed during the crisis in 1998.”
Today, Russia is distancing itself not only from developed countries but also from many developing ones because of the collapse of the rouble in 2014-2015, which led to the parameter ”exchange rate-PPP ratio.” This puts Russia in an unequal position of exchange on the world market (including in the purchase of modern technologies). According to estimates of the OECD and the World Bank, the exchange rate of the rouble against the dollar in terms of PPP was 19-23 roubles per dollar in 2014-2015, or even before the collapse at the end of 2014, the exchange rate of the rouble had been undervalued in comparison with the PPP rate. During January/February 2016, the average rate was 77 rubles per dollar, in other words, the rouble weakened 3.3 times compared with the PPP rate.
The printing machine as a growth factor.
The second point in the proposal is in the same spirit: “The size of the monetary mass, together with the use of a multi-channel emission target mechanism for refinancing commercial banks and institutes for development, under conditions compulsory for the state.” Money must be directed “to priority sectors at lower rates and in binding control over the appropriate spending of these funds.”
Target-orientated means to priority sectors must provide growth of activity in similar sectors so that together, they contribute to higher rates of economic growth, diversification, improvement of technical levels and competitiveness and to lower inflation.
Do not be afraid of a budget deficit.
In the third point, Sergei Glazev appeals to the CB, the Ministry of Economic Development and the Ministry of Finance to work closely together, to strictly coordinate their activities and not to be afraid of a “moderate amount of budget deficit in order to stimulate economic growth.” Glazev calls the budget deficit “an important tool for economic growth,” especially during times of economic instability. The increase of the budget deficit could finance research and development activities and stimulate innovative activities of business.
“This will lead to a moderate shift of external debt with internal debt. Such an approach will stimulate economic growth, promote and enhance the role of internal factors of economic growth, by neutralising the effects of adverse economic conditions,” argues Glazev. He considers any arguments against increasing the budget deficit as irrelevant, because the moderate deficit which is controlled in the direction of expenditure, is a lever for securing economic growth. “Any future growth must be based on investment costs, which make such growth possible (today spending and investment, tomorrow their results),” Glazev said.
To ensure economic growth, it is necessary to activate the mechanism of the state (budget financing) and the available mechanisms of the CB, the sources of financial resources and the emission centre. According to Glazev, the CB can buy government bonds issued by the Ministry of Finance and, at the same time, to realise a targeted emission which the government must use to finance the budget deficit, formed as a result of increased government spending for economic development.
Thus, the CB will be able to secure long-term credit for the state and enterprises; the economy can receive a considerable investment impulse, which will multiply by including the “long-term” private sector projects. Moreover, the target emissions will allow financial resources to focus on priority objectives (mortgages, small businesses and others), which will saturate these areas with resources and reduce interest rates. On this subject, Glazev concurs with his counterpart from Stalipinski Club, Boris Titov. Currently, Titov is preparing one of the options for the programme to stimulate economic growth for the President. In an interview with Gazeta.ru, he said that the Russian economy will need two trillion roubles in 2017, on the base of returns.
The fourth proposal
Stabilising the exchange rate of the rouble also results in “reducing the base rate to the level of the average yield in the real economy.” Lowering the interest rates can be tied to limiting bank margins in the event that the Bank participates in targeted lending to manufacturing companies. For such participation, authorised banks will receive incentives to refinance debts and norms for reserving the means.
Finally, Glazev blames the CB for a lack of consistent and transparent policy. The market needs a “clear definition” of the rates preferred by the regulator.
Growth without delusions.
In summary, Glazev pointed out that the process to internal monetary mechanism for growth, the increased level of the monetisation of the Russian economy, stabilising the currency market, renouncing inflation targeting and the free-floating of the rouble will stimulate the transition to more favourable macroeconomic indicators. In other words, “it will allow for a tangible compensation for the decline in oil prices, and the Russian economy will achieve sufficiently high rates of growth.”
According to Glazev’s calculations, the use of multi-currency issue, the refusal of the regime to freely-float the rouble and an inflation rate of not higher than 8%, will allow the Russian economy to achieve annual GDP growth of 6.5% to 7%.
Glazev is a member of the National Financial Council (NFC). This is a collegial body formed on a quota principle by representatives of the President, government and both Houses of Parliament. The NFC is a supervisory body, its powers are enormous – from controlling how the Russian Bank performs an assessment of the costs, to annual reports to determine the unified state monetary and credit policies.
Glazev systematically gives negative assessments for the course of the politics of the CB, but for the first time, he offers an alternative PAC. Some time ago, he criticised the report for the sources of economic growth, prepared by the Centre for Strategic Studies under the leadership of Alexei Kudrin. In a letter to Kudrin, Glazev characterised the programme as a document “built on widespread misconceptions,” firstly regarding inflation and its impact on economic growth.