This article presents an external vision of domestic economic processes in Russia.
The SouthFront Team received feedback on this article from several experts on the Russian economy. They agree on the following: if considering Russia as an ideal socially-oriented system, that is a fusion of the Soviet socialist heritage and real democratic principles, the proposals made by the author of the article are very acute.
However, SF considers necessary to clarify that the Russian Federation is no longer a “separate planet” as it was before, but a part of the global system that is governed not by principles of the common welfare, but of the chosens on the basis of wealth.
Written by Sunil Bhattarai.
Russia since 1992 has been under a tight bind from western financial influence which has been preventing its independence from US influence and reducing GDP growth rates as well as causing high inflation. This has reduced potential development of Russia greatly and here we are discussing few reforms which will completely change all that and believe me we will create a independent and powerful system which will be more resilient than soviet economic model against pressure at the same time generate prosperity the west can only imagine.
They are listed as follows and we will discuss them in detail-
1.Corporate reforms- 2.Central bank reforms-
3.Capital market reforms- 4.Resource extraction reforms-
US control of Russian business through its financial might is the most dangerous detriment for the welfare of Russian citizens and independence of the country. They sanction any business that are not supportive to them and support the ones which are anti-government, although the Russian government along with its intelligence are trying their best to prevent it they will have a hard time due to corporate greed and enormous money that US offers but we can solve this problem with the reform I am suggesting in a simple and effective way.
They are differential tax system, salary and margin limits
A. Differential taxes
A new corporate tax rate rather than current 20% on profit which is a variable one where
|% of shares on free float in Russian exchanges only||Corporate taxes|
|50% or higher||5%|
|Above 25% but below 50%||10%|
|Private companies, foreign listed companies||20%|
-1% Capital gain taxes for Russian citizen and 20% for dividend to foreigners.
-foreigner are banned from taking part in primary equity offering in Russian Exchanges.
-Foreign listed or registered company cant gain tax benefit and foreign company wanting to do business in Russia must open a subsidiary or choose a national distributor, they can gain benefit after public listing as mentioned above.
This will increase the size of Russian stock market and reduce foreign influence through their capital market by epic proportion while preventing foreigner from primary offering will benefit Russian citizens giving them a valuable income source.
The low Capital Gain taxes will empower Russians while high taxes for withdrawing them to foreign country will increase long term foreign investment and decrease rampant speculation in Russian markets.
I guarantee that this we create a huge delistings by Russian companies from foreign exchanges increasing domestic capital and financial sovereignty.
B. Salary limits
The haphazard salary system in Russia is reducing growth while at the same time increasing hurdles for labour productivity and real income growth.
First government should make following rules on salary-
-For a large business the salary difference between lowest and highest paid employee cannot exceed the ratio 1:50, and minimum salary must be 1/3rd of median salary.
-For SME the salary between highest and lowest paid employee cannot exceed 1:10, and minimum salary must be 1/3rd of median salary.
-Every company must hike the salary of their employees biannually such that year on year growth in salary is at least 3% but cannot exceed 5% (1% above or below CBR inflation target)
-All new hires will be given minimum starting salary equal to 1/3rd of that company median salary.
-Highest salary for inexperienced employee is equal to company median salary or median salary of Russia whichever is higher.
The distribution salary must be in following system-
30% of salary daily in rate =(30%salary)/(days in the month)
30% of salary weekly in rate=(30%salary)/(Friday in the month)
40% at month end.
Where total salary is 100%.
C. Margin limits
Margin is the difference between output prices and input expenses expressed in percentages.
Margin=(Output price-Input price)/Input price*100%
So what is margin limit on corporations?
Other than the corporate profit taxes, margin limits are anti-monopoly tools which prevent businesses from over profiting and driving inflation as they always do in Russia. Profit taxes are paid after margin adjustment.
If their margin exceeds certain limit all excess money will be collected by the state and deposited to the citizens account on per capita basis.
-The corporations must release a margin sheet that gives information about their inputs and outputs both and must be made public.
The margin limits for various type of businesses are-
|1. TRADING (CAPITAL,WHOLESALE AND RETAIL)||10%||–|
|2. Primary AGRICULTURE AND LIVESTOCK||200%||–|
|3. MANUFACTURING AND PROCESSING||20%||UP TO 50% IN FIRST 2 YEARS|
|4. EXTRACTIVE INDUSTRY||20%||UP TO 50% IN FIRST 4 YEARS|
|5. ELECTRICITY AND HEAT PRODUCTION||10%||UP TO 50% IN FIRST 3 YEARS|
|6. GRID OPERATORS LIKE ELECTRICITY, PIPELINES, ROADS AND RAILWAY||20%||UP TO 50% IN FIRST 5 YEARS|
|7. BANKING AND FINANCES||–||REGULATED BY CENTRAL BANK|
|8. SME businesses except Retail stores||50%||UP TO 100% IN FIRST 2 YEARS|
Note that input prices include capital costs like interest and debt repayment as well as depreciation.
CENTRAL BANK REFORMS
Central Bank is the main institution for controlling the Banking system, maintaining its financial stability and regulating the markets for stability, maximum possible growth with lowest possible inflation and unemployment.
While CBR (Central Bank of Russia) has been able to achieve low unemployment while unable to do anything about rest of the things which is destroying Real income of Russians and damaging businesses and economy.
It has also done nothing to contain foreign interference on financial sector while only taking symbolic step of reducing US treasury debt.
Here we will discuss some reforms on Central Bank to improve on these points for a strong and prosperous Russia-
- Refinancing and Monetary reform-
- Banking reform and cleanup-
- Ruble value management-
Lets dive in to know in detail, shall we ?
A. Refinancing and Monetary Reform
Central Banks are generally lenders of last resort or who lend money to Banks when there is shortage of liquidity to make Baking smooth but at the same time they tax the citizens in hidden way through inflation which is why this system must be changed and replaced with a modern inflation targeting and refinancing model.
So lets know about inflation which is the decrease in value of money mostly due to currency printing by central banks which result in a lot of money going for limited goods and services increasing their prices but without small inflation expansion of the capacity for those goods and services is not possible so inflation must be there but it must be low, lets target inflation at 2% for Russia and explain our reform point.
We will reform Central Bank from lender of last resort to safest investments for Banks.
In this way:
-CBR will give interest on money Banks keep at CBR as deposits equivalent to key rate at 5 day interval.
Example- If annual key rate is 5% then every 5 day interest = 5%/73
-The interest will be fresh money printed and since inflation target is 2% we will only print money such that year on year money on economy grows by 2%.
-If interest given exceeds money growth we will ignore it since its necessary and reduce inflation as banks increase rates to businesses and individual for new loans.
-If money growth target of 2% is not fulfilled by interest payment to Banks then we will deposit the excess money required to citizens accounts on per capita basis.
While this solves the problem of inflation, another method called interbank exchange is necessary for smooth Banking system.
IBLM ( inter bank lending market ) will be operated by CBR 24/7 at 365 days such that Banks can buy and sell deposits for short term while individuals are able to buy deposits but not sell them. Bidding occurs every 10 seconds and maturation time is 5 days or 120 hours or after 120*60*6 bidding session.
This works as:
Bank A needs money to pay to depositor but does not have cash as it has invested money in loans.
So its posts a deposit bill in IBLM in this way 5000 rubles bill for 5 days goes to highest bidder and if another bank or bidder is bidding for 4998 rubles and its highest bid price then it goes to it. Note that bid price cannot exceed 5000 as we will not allow negative yield.
Here after 5 days bank A gives Bank B 5000 rubles for it getting 4998 rubles now.
Interest Bank B got annually = 2/5000*7300= 2.92% annually.
Generally its slightly lower or higher than CBR key rate and individuals as well as Finance Ministry can bid for IBLM bills but cannot sell them like Banks.
Its will result in smooth financing and operations of Banks without inflation generation as CBR financing of Banks do.
B. Banking reform and cleanup
Although current CBR governess Elvira Nabiullina has been quite successful at reforming activities of Banks and cleaning up weak, unorganized and corrupt banks. Its a costly process and many other Banks are simply taking their place so some strong rules must be made to prevent it and believe me no country can have a good growth rate without strong and trusted Banks and Russia well has very few of them.
So lets list and explain the reforms and cleanup we need to do in Banking system:
-Banks must have their paid up capital as mandatory reserves in CBR and can only give loans 20 times that amount.
-Loan to Deposits ratio cannot exceed 90% and when it does no loans will be approved.
-Banks with NPL cannot issue further loan until they appropriate reserve equal to the NPL amount along with its expected interests.
-Banks are allowed maximum 5% NPL and any bank with amount higher than this will be immediately liquidated by CBR.
-All bank loans are given on fixed rate for a particular time:
|Short term loans||3 months, 6 months, 1 year|
|Medium term loans||3 years, 5 years, 7 years|
|Long term loans||10 years, 20 years, 30 years|
-Gross interest income which is interest received after operating expenses and appropriating for NPL is used to give interest on citizens deposits,(80% only rest goes to shareholder profit)
Types of deposits:
Current account- no interest
General savings- 10% of payout amount
Term savings- 90% of payout amount such that
(you cannot withdraw money before term ends)
Short term savings get 20% of it which is divided as 20%, 30% & 50% for 3 months, 6months and 1 year savings
Medium term savings get 30% of it which is divided as 20%, 30%, 50% for 3 years, 5 years and 7 years savings
Long term savings get 50% of it which is divided as 20%, 30%,50% for 10 years, 20 years and 30 years savings.
Last is Pension savings where pension fund puts money in the bank for the scheme which gives maximum yield to depositor, but you cannot withdraw it.
All bank deposit interests are paid at 3 months interval, but for pension savings acquired interest is paid daily until interest is acquired after 3 months.
-Retail loan cannot exceed 30% of total loan portfolio, all loans except retail must be made publicly available – maximum classified loan at 5% (updated every weekend).
Lastly not all banks will be able to do it and be competitive so its best CBR continuously reduces their number to around 50 but not less than that.
Small financial institutions must be allowed to operate like microfinance where NPL can be up to 10% but all loans must be public.
C. Ruble value management
Yes ruble is a freely floating currency which is regulated by intervention in a way that is devastating for Russian economy.
When exports are high the CBR and MinFiN buys foreign currency reducing import and real wealth of Russians and when exports fall sells foreign currency to offshore oligarchs eliminating hard earned Russian savings and this is called budget rule a total bullshit.
I suggest a alternate approach that buying foreign currency in high export scenario is fine but when export falls due to low oil price do not sell foreign currency on markets but rather transfer them to accounts of Russian people in per capita basis so that they will later exchange them in market and consume which makes sure that income and savings of People returns to them, boosting economy and Ruble exchange rate at the same time.
3. Capital market reforms
Capital market means exchanges of mostly equity and bond but also mercantile trading.
-Although Russia has large exchanges, the instrument on offer are less and they must be increased to include all major commodities with receiving and delivery terminals in all Russian Regions.
-All the instruments must be denominated in Rubles only, ban any non-market export deals of commodities larger than 50% of total, the exchange then manage sales of those instruments abroad through a intermediary for commodity export purposes.
-Give income tax benefit to companies publicly listed in Russian exchanges only, as mentioned in corporate Reforms.
-Government should auction debts in a fixed calendar easily available for general public through online, minimum amount on offer must be below 5000 rubles allowing better yield for public savings and easy funding of debts.
Regions and municipalities should follow similar method and calendar.
-Corporate debts should also have minimal investment value of 5000 rubles for individuals and similar for primary equity offering.
-Ban foreigners from initial equity offering on exchanges.
Building separates exchange for large, medium and small companies to go public perhaps use MOEX for large, RTS Moscow for medium and SPEX for small ones with trading commission higher for small companies and lower for large ones.
That′s for the capital markets.
4. Resource extraction Reforms
The enormous resource of Russia is creating growth and prosperity for Russians but not as much as it could have. A lot of the money is simply siphoned offshore and all the people get are feeble salary those companies pay to them.
After Putin came to power some reforms has been implemented which has been reducing that money flow to some extent but as you can with Yukos case those western corporate thugs will not leave Russia alone so here are the reforms that I am purposing for the resource extraction activities which will include hydro-power, wind, as well as solar in addition to other non-renewable resources.
All the projects in these field must choose one of the model for operation
-Mineral Resource Extraction Tax ( MET)or
-Build Own Operate and Transfer (BOOT)
Mineral Resource Extraction tax (MET):
In this system taxes will be paid based on mineral they extract from the mines. The taxes are as follows-
|5% MET||When price of resource is below 3 year low|
|10% MET||When price of resource is between 3 year low and 3 year high|
|30% MET||When price of resource is above 3 year high|
There are also some tax incentive to increase investment in mining industry. They are:
|Tax benefits on met||75% on first 5 years||50% on next five||25% next five||No benefits after 15 years|
- Build Own Operate and Transfer (BOOT)-
The next method is BOOT mechanism of taxation, for this we must have a state owned company in every mining sector and the taxation is like this-
|MET rate||0%||0%||0%||Usual rate|
|Time of operations||First 5 years||Next 5 year||Next five year||Rest of its life|
This system of taxes will greatly help small investors and result in development of small scale reserves for cheap domestic use reducing inflation.
That’s all guys, these are the reforms the Russian government and policymakers should implement immediately for low inflation, high growth economic model of the country with high degree of resilience to shocks and reduction malign foreign influence.
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