Russian economy: Any changes coming?

Alexei Kudrin's departure from the post of the Finance Minister may cause changes in the future development of the Russian financial system. After each election, Russia can see either preservation of the existing socio-economic model, or its modernization.

In any case, it will be problematic to maintain the existing positions.
 Analyst FG "Kalita-Finance" Dmitry Golubovsky in his study of the results of Kudrin's financial and economic policy noted a clear correlation of the total external debt of the Russian Federation and the international reserves of the Bank of Russia, even before the crisis began in late 2008. According to him, foreign debt, starting in October of 2006, has been correlating very well with the reserves of the Bank of Russia. Even more so, it is nearly entirely covered by them, as if the stock and foreign exchange liabilities of the Russian Government, banks and corporations simply mechanically are reflected in the assets of the Bank of Russia.



"The local minimum failure - the bottom in 2009 - was $320 billion, corresponding to the values ​​previously reached in late 2006 - early 2007. The value of the international reserves of the Bank of Russia in this period, too, was a little over $300 billion. The local maximum of 2008, as the reserves of the Bank Russia, was a little over $600 billion. Only after the crisis the approximate match of the reserves of the Bank of Russia and M2 was distorted. M2 today, expressed in USD, is 731 billion, while bank reserves of Russia - about 517 billion This indicates that the Bank of Russia after the crisis of 2009 became more willing to refinance the banking system of Russia, apparently, through the growth of Government Securities Market. The budget deficit has played a positive role in this case, forcing the Treasury to develop the market of ruble loans," said the expert.

Golubovsky noted that nearly all of the money supply in Russia before the crisis was backed by the inflow of foreign currency income in the form of exporting foreign currency loans from banks and corporations, and foreign capital flowing to the Russian financial market. This capital, as a rule, is speculative. For this inflow of the foreign currency, when the ruble is pressed to the bottom of the "currency corridor" targeted by the Bank of Russia that restricts the fluctuations of the ruble, the Bank of Russia "prints" the ruble. This is the way Russia is expanding its monetary base and reserves are formed at the same time with the Bank of Russia. The Russian monetary base is backed by the state debt of foreign countries. Russia's state debt does not secure Russia's money.

The policy of the Bank of Russia today is determined by a compromise between a sufficient amount of reserves and domestic demand for liquidity. The compromise is achieved through the exchange rate policies of the Bank of Russia. Accordingly, "excess" capital inflows during periods of ruble appreciation is "sterilized" in the reserves of the Bank of Russia  that serve as the notorious "safety cushion" proportional to the external debt of the aggregate, for which the growth at the end of 2006 corresponds exactly to the corporate part. The budget surplus obtained by the Ministry of Finance from the export "windfall profits" is also placed in foreign securities (so-called Stabilization Fund and National Welfare Fund).

"Given the fact that Russia has not the export - commodity dependence but the export credit and raw materials dependence, we are largely dependent on the cost of loans for our exporters and importers. Due to the nature of the economic model in which all of the money supply, including for the internal market, is created from the outside, all the credit in the economy depends on the external conditions. This is the reason why in times of poor foreign economic conditions, domestic economic situation is even worse, and the business oriented to the domestic market suffers even more. Some countries during the crisis could rely on domestic demand, but not Russia. Central Banks of those countries could reduce rates and increase money supply for the domestic market, and it slowed down the fall. The Bank of Russia also had to shrink the monetary base by selling foreign currency for rubles to banks and corporations, who borrowed money from foreigners to pay their debts to avoid getting into the hands of creditors, "says Golubovsky.

The conclusion is that the notorious "safety cushion" has been and remains to be a security deposit on foreign loans of a rather narrow range of export commodities and financial companies.
The practice of withdrawal of liquidity from the Russian economy and placing it in foreign securities means that Russian banks and corporations still come for this liquidity to foreign banks. The Russian economy was loaned its own savings at the rate of commercial loans, while the savings were placed at an interest rate lower than inflation. When it was time to pay the bills, this "safety cushion" worked only for the banks and corporations. In fact, it hedged their currency position. The Russian people at the same time were handed a "smooth devaluation" and unemployment.

At the same time the notorious "windfall" in the country emerged from the excess dollar liquidity. But why are they reflected as bubbles in the ruble equivalent? Only because the ruble is "printed" for those dollars. Thus, the "excess profits" of commodity exporters in the ruble equivalent are created by the Bank of Russia. Later they are withdrawn in the form of taxes by the MOF. This entire process is accompanied by acceleration of inflation, which is an additional burden on the least financially secure population.


"Perhaps, after the departure of Kudrin from the post of minister of finance, those healthy seeds that were recently observed in the policies of the Bank of Russia, aimed at gaining their independence from the Treasury and the transition to a free exchange rate, will grow more intensely. I would like to hope that The Bank of Russia in the future will be guided more by the real needs of the banking system's liquidity and control inflation and interest, rather than the needs of super-profits of the exporters who pay taxes to the Treasury (because it is easy to collect taxes from the pipe and customs)," summarizes the expert.

Valentine Vasspard.