Since the spring of 2014, Washington and the EU have entered hostile and baseless financial and economic sanctions against Russia. President Putin and the Russian government have taken a lot of commendable and sometimes brilliant steps in response to the actual start of the fiscal war. However, they did not take into account the instability and vulnerability of the Russian economy and the monetary system. If this issue is not resolved in the near future, it will become the Russia’s “Achilles heel”. Fortunately, Russia can take some steps before an alternative to dollar currency appears. The situation must be analyzed.
Originally appeared at Celado, translated by Olga Seletskaia exclusively for SouthFront
The key issue for Russia, like for any other economy, is the question of who controls the emission and circulation of funds or money, and whether they do this by supporting private large corporations, or it is done for the national good.
After the fall of the Berlin Wall in November 1989, the Union of Soviet Socialist Republics was plunged into chaos. In July 1990, one of the first “democrats”, the newly elected president of Russian Federation and a “hero” of Western media – Boris Yeltsin, a month after the declaration of independence from the Soviet Union, made changes to the Russian Constitution, adding Article 75, that allowed to establish the Central Bank of the Russian Federation.
At that time, the hedge fund speculator Soros assigned Jeffrey Sachs and Anders Aslund to be advisors of Yegor Gaidar and Anatoly Chubais, the authors of Yeltsin’s “shock therapy”. Together, along with pressure from the IMF, they plunged the country into chaos and unbelievable economic collapse of the 90-s. Retirement savings and pensions turned to dust when the State Bank of Russia under the Viktor Gerashchenko’s lead printed an infinite number of worthless rubles, thus creating an enormous hyperinflation. A handful of Russian oligarchs close to the Yeltsin family, such as Mikhail Khodorkovsky and Boris Berezovsky, became incredibly rich while the majority of the population barely were making ends meet. It was a kind of social “Petri dish” for the Article 75, which enabled to establish the Central Bank of the Russian Federation.
According to the Constitution, the Russian Central Bank, being a shareholder (0.57% stake) of the West-controlled Bank for International Settlements in Basel, is an independent institution. Its main function is to protect the stability of the national currency – the ruble. It also has the exclusive right to issue ruble-denominated banknotes and coins. It is, in fact, the foundation of the Russian economy.
Having adopted the Article 75, the Russian Federation by de facto gave away its fiscal sovereignty, its most important powers – the right to release the funds and loans.
It bothers President Putin, his government, and the Russian people. The financial war unleashed by the United States and targeted sanctions forced the Central Bank to increase in December 2014 the key interest rates by three times, up to 17% in an attempt to stop the free fall of the ruble. Today, despite the significant stabilization of the ruble, the official interest rates are up to 11 % .
Russian Central Bank, regardless how patriotic its managers are, is a monetary institution, and its policy is not part of the policy pursued by the sovereign state. “Stable” rouble means its stability against the US dollar or the Euro . This means that an independent Central Bank is by de facto a hostage to the dollar, which is an undesirable factor in circumstances of actual war, carried out by NATO, by Obama’s Ministry of Finance, by the CIA, the Pentagon and by neo-conservative US war hawks .
During the World Economic Forum held in St. Petersburg in June 2015, a high-rank official told me that the government and Putin’s advisers had an intense internal debate on the re-establishment of State National Bank, as opposed to the independent Central Bank, based on Bank for International Settlements and imposed on Russia by the West in 1990.
National Development Bonds
Although this very positive and necessary step in the transfer of control over the money supply and credit to the state has not been done yet, Russia can still take some actions. They are elegant in their simplicity, and they do not require a direct alternative to the dollar system to increase the capital for restructuring Russian economy from Magadan to Sevastopol. Monetary capital will come from Russia itself, resulting in the creation of government-guaranteed bonds, “National Development Fund of Russia” and the personal savings of citizens of the Russian Federation. The name of the Fund is not yet official, but that is not so important. What is important is how it will work?
It is supposed that the Duma will approve the establishment a special 100% state-owned fund within the Federal Treasury of Russia. The Fund will be allocating money for large infrastructure projects of national importance, and it is not designed for regular state budget expenditures. If this requires a separate trust fund in the Treasury Authority, the board of directors, other than the current Cabinet of Ministers, will be created. The aim is to ensure the use of the trust funds on infrastructure needs, defined in state planning, with a minimum of new bureaucratic layers.
This Russian National Development Fund – which is extremely important – will issue government infrastructure construction bonds directly through the Russian State Federal Treasury, rather than through the independent Central Bank of Russia or other banks. Infrastructure bonds will be sold not to private banks which charge their interest and give credits to fractional reserve, but directly to the citizens, they will be, so to speak, “civil bonds.”
To attract the savings of Russian citizens, National Development Fund of Russia, housed in the Treasury, will be authorized to issue long-term, 20-30-year bonds at approximately 15% annual interest, given that inflation is stabilized at a lower level.
It is important that the new bonds will be issued for at least 20 years to ensure continuity of work on major projects. The creation of the fund will have a significant impact on the current level of inflation since productive investment in economic infrastructure is a measure to counter inflation. This will lead to an increase in turnover of industrial goods, and it will create manufacturing jobs, which directly depends on the borrowed funds allocated by the authorized administrator. Annual interest on the bonds, as well as their principal amount will not be taxed, and this will be another incentive for the investments. The principal amount will be paid back to the citizens on the bonds’ maturity date.
The original holder is not required to personally keep them for the entire 20-year maturity period. There is some form of secondary market for reselling the bonds under certain conditions to another investor, for example, through a new bank of Russia Post. The bonds will be sold not by private banks, but in the framework of the Russian national postal system, thus eliminating costly and risky private secondary trading. To make it work, Russia Post should be government-controlled. The bonds will not be issued in the format of a digital computer recording, but in the format of paper securities.
If the decision to create a state fund for infrastructure development in the framework of the Treasury, but separated from it for the above reasons, a board of directors consisting of respected and independent citizens will be required. It will increase the level of people’s trust in the new organization.
The progress of funded projects can be regularly reported to the population as “reports on achievements” in the form of documentaries and videos on the Fund’s website. Seeing actual results of their investments will increase the people’s loyalty to them. While stock markets around the world are losing billions of dollars face value of assets and foreign currency, and world commodity prices make crazy jumps, Russian infrastructure bonds, guaranteed by the state, will become an island of stability in these international turbulences, and they will be the motor for real and vital national economic growth. Utilizing resources of National Development Fund is supposed to help increase regular tax revenues, which would far exceed the cost of servicing the interest on bonds.
This eliminates the need to introduce new burdensome taxes to finance it.
Over the bonds’ 20 years, the government will be announcing tenders for national infrastructure projects of special importance, such as the modernization of power lines, construction of national high-speed rail network that is compatible with the same high-speed rail network in China. These projects will provide well-paid jobs for hundreds of thousands of Russian citizens. In turn, the new jobs will pay the regular income tax on gains from the construction of the new Russia. This will allow the Russian government to fund national needs, regardless of financial sanctions and the West’s credits.
A Little Known Fact
There is a secret about investing in economic infrastructure. In contrast to the various projects subsidized by the governments of the EU or the US, which are in fact “the construction of windmills,” the creation of the necessary economic infrastructure, such as high-speed railway and other projects, forcing the economy to run faster and more efficiently, brings numerous benefits for the economy as a whole. This is a long-forgotten “secret” of investment in infrastructure, which was opened in America during the Great Depression, when the government was issuing bonds for the construction of a huge national hydroelectric complex in the Tennessee Valley and other major infrastructure projects.
Various studies of the US in 1960s show that when America invested in national infrastructure, the cost of return in tax revenues was about 11$, (in our case rubles) per dollar (rouble). This is the secret of a well-designed investments in infrastructure.
Count Sergei Witte, the Russian Minister of Railways, who later became finance minister and then chairman of the Council of Ministers under Emperor Nicholas II, understood the vital role of public transport infrastructure in the construction and modernization of Russia. He was the founder of the largest at that time Trans-Siberian railway project, a project that challenged British global domination at the seas and made Britain worry.
Britain and later the United States, fought in two world wars of the 20th century to prevent further development of such trans-Eurasian rail lines, which Mackinder called “the heart of Eurasia”. (For more information see William Engdahl. “A Century of War.”) Now China and Russia join their efforts to build such a railroad.
Creation of the Russian National Committee of Development is supposed to enhance role and participation of Russia in the global economy, geopolitics and cultural ties, by using its internal resources rather than foreign borrowed money.
If citizens are to buy bonds directly, the Russian government will avoid the necessity to raise funds through foreign capital markets, even if they are as friendly as China. This will help to avoid a burdensome external debt.
Depending on how the purchase of government infrastructure bonds will be presented to the society during the current crisis, they may become a symbol of state patriotism and personal contribution to the prosperous future of Russia.
In other articles, we will discuss the most important advantage of the state-owned National Bank, independent from the Central Bank.
Russia has in abundance all that may be required for the state to build a new world of stability and prosperity for its people and to become a role model for other countries. It may happen sooner that it may seem. Russia has a strong will and determination, which shows in the situation of dirty sanctions and harassments in recent months. Russia has the most educated scientists in the world and the skilled workforce. All resources are present in abundance. The only question in shaping the flow of resources and human resources in the right direction.
It is the perfect time for the establishment of the Infrastructure Fund – when the nation is united as ever against hostile Western sanctions and attacks, with the President, supported by more than 85 % of the population. He invites every Russian citizen to support the construction of the nation, and to start making future earnings at the same time.