Should the Russian financial system be saved?

Recent developments became a confirmation of the previous diagnosis of the state the world's financial system based on the dollar as its leading currency. Its Russian appendage also was a little feverish. The "world's financial architecture" that currently looks very much like an ant hill made a mess of by stray teddy bears is likely to go through really dramatic changes.

I'd venture on a brief historic retrospective. The state of hypertrophy of the financial sphere as the principal cause of the current Western crisis indeed has a long history. One of its components was the transfer to "floating "moneys, their excessive trading, insurance of currencies and the removal of the limit of accounts for international capital movement. The abolition of this limit in the leading industrialized countries was perpetuated in 1973-1983. The step produced chaos Susan Strange aptly called "Casino Capitalism" in her book "Mad Money".

The emergence of international capital markets and the continued spreading of full negotiability over the rest of the world were accompanied by the continuous slowing down of world economy growth rates. To all appearance the current decade would not be an exception to the rules. That is of special importance to the countries that are deeply integrated into western markets (in Russia they are equated to "global economy"). The continued overgrowth of the financial sphere (and the convertibility sphere at large, too) effectively resulted in withdrawals of resources from the depressive production sector. The situation was also deteriorating due to the fact that economies more and more often began to be managed by "financial gurus", or, simply speaking, ledger clerks of dubious repute.

Viewed globally, Western capital (after the 1973 "OPEC oil riot") was trying to regain full control of resources of the developing countries using mechanisms of expensive credits, "debt strangleholds" and even deliberate provoking of currency and financial crises in too boisterously developing economies. That was also done by enacting the mechanisms of emerging financial markets with a forced lifting of control of financial flows. The in-depth scrutiny of this sphere was made by Nobel Prize winner Joseph Stiglitz. We should agree with his conclusion of the causes of the 1997-1998 Asian currency and financial crisis. He wrote that liberalisation of the accounts of moving capital was the sole most important factor that provoked the crisis." This outstanding scientist has nothing good to say about the IMF and the likes of George Soros.

I can assume that nothing but the activities and the very nature of the latter served as some sort of a warning to sober-minded responsible financiers. As it turns out, most of them make their homes in Asia. So, contrary to the assumptions of a harmonious global combination of Western capital and work done by "peripheral" countries (making the basis of neo-liberalism) , by 2005 the picture was totally different. The attempts to fully liberalise financial markets failed. The major developing countries (to say nothing of oil-exporting countries) were suspicious of the idea and gradually became financially self-sufficient, rich in "convertibles", incorporating the selective use of foreign investments and actually broke down the monopoly prices on credits. Neither money nor specific institutes of the developed proved redundant in the conditions of financial globalisation they themselves launched. Locked in by their own moves, western finances began to destroy themselves.

That is why the threat of the continued deflation or even a blow-up of the Western financial bubble that was initially created chiefly due to the monopoly on "genuine" money and international credits, and currently - due to its loss.

The United States is especially hard hit. The dollar has ceased to represent global monopolies in the new century - including production, technology, information, ratings and other spheres.

The qualities (features and functions) of this currency were doubted, especially in its role of the means of saving.

The dollar is still satisfactory as a means of payments and account settlement, as the old law has it that "bad" money keeps circulating. No one is eager to discard it for good, but something more reliable should apparently be chosen for growing or even saving one's wealth. For example, the currencies of Asian countries that are currently gaining in their values supported by the growing commodity base, high growth rates and correspondingly, higher returns. These currencies are ensured by predominantly the producing rather than consuming economies with a high level of self-sufficiency.

The very amount of the US trade deficit is astounding ($838 billion in 2006, and $815 billion in 2007). Last June the trade deficit amounted to $70 billion, the same as in January, which means that the dollar to Euro depreciation had no positive effect on the trade balance.

Alas, the USA is uncompetitive in the commodity production. The daily import of goods exceeds their export by more than $2bln, and revenues from export of services have long been swallowed by external debt payments.

And let's get back to the subject matter of this article and its heading. Let me remind you that in the summer of 2006 the rouble became fully convertible. In other words at that time Russia turned into a player on (or appendage of) western financial markets. So, aside from the joys of the growing indexes and capitalisation there came the inevitable tears of sorrow over their "unexpected" fall.

In the case of Russia in 2006-2007 the swelling of an excessively liberalised financial market could evidently not be viewed as the best way of accelerating investment processes. With the average amount of capitalisation of financial markets at the turn of this century was 90% of GDP and 20% of GDP on "unripe" markets, a different conclusion should have been made. That situation as Russians realize more and more bitterly now was indicative of the site of concentration of problems to be faced by the global economy and highly likely - of its potential abrupt fluctuations. So, "underdevelopment" of financial markets should hardly be overcome at all, to say nothing of at a too high a rate. It should be recalled that on the eve of the 1997-1998 Asian crises capitalisation of the stock markets in a number of Easter Asian countries grew to 150% to 200% of their GDPs.

One could of course set out looking for "western conspiracy", and even to succeed in this search given that the Kremlin was overtly disobedient in August.

But is not easier to consider the issue of right timing for making the rouble fully convertible? Do we have more money than China, which does not have it yet? Or is Mr.Kudrin and his team wiser than Indian financiers who are in no haste to fling the doors of their stock exchange open to anyone, taking pains to filter the money bags arriving to their country?

It could be worthwhile to admit that the decision taken in 2006 was based, on the one hand, on the worn-out outdated IMF prescriptions and on the other - their unwillingness to tackle the problem of financial control?

And, finally, the fathers of our remarkable financial system should take the responsibility of stating that the principal goal of A.Kudrin's group of economists in the government is creating hothouse conditions for its institutes. What a wonderful phrase -"lack of liquidity"! What does it have to do with our money-lenders who rake in 15% to 20% interest for mortgage credits to young families and businessmen, and who say they have no money? They are still free to borrow money in the West at 7% to8% interest.

What price an international financial centre in Russia? Whose is this brilliant idea? Understandably, the phrase can mesmerise one for a time, as did the term "capitalisation", but should we not start by admitting that this country does not have a credit that would be competitive according to international standards. No other than A.Kudrin recently explained that financing of 90% of investments is done by businesses and enterprises themselves. In the meantime our financiers of genius engage in creating speculative bubbles or simply grab any opportunity to adopt new legislative acts for gaining access to free money say in the form of mandatory insurance of deposits, cars and other vehicles, and so forth. Is it not clear that with all these easy-to-use leverages the financial sector would never become a helper of the production sector, even overwhelming it by ample crediting of imports of consumer goods?

What about fighting inflation? As A.Kudrin explains it to us "ordinary people" with reference to "the Dutch disease" and other fashionable terms, it is almost an inherent characteristic of Russia. Well, then why not to inquire how China, as "an economy in transition " goes about fighting inflation, bringing it down to 4.9% in August from 9% (calculated as annual) in January? All told, oriental financial advisers would not be out of place in Russia. I remember that money was flowing in the pockets of experts from the IMF and other institutions, even when we were empty of pocket. And by the way, no other than these experts are now responsible for depreciating western finances with the ensuing deplorable nationalisation of once highly esteemed institutions.

Not more than 5% to 6% of Russians have saved enough money to live modestly for at least 12 months. 17% to 19% have something in terms of savings. And that's the verdict to the Russian financial system.

In other words, Russian socio-economic policies, based on eclectic borrowings of quotes from the now dead neo-liberal doctrine and social Darwinism, are bankrupt. The need for its decisive review is evident at least from the viewpoint of the fact that Russians are scary expecting the continuation of the reforms of the utilities and public health sectors bewildered at the mess in the area of education and energy. One more thing is also evident: the social ill-being of the nation is the direct consequence of the inadequate investments into the production sphere, and deliberate blowing of bubbles on real estate and securities markets and inept anti-inflation fight led by mediocrities.

What is needed is good flogging and a most resolved re-education of the financial system, this voracious sophomore that has become an intermediary between real earnings and people's pockets.

With the above description of the current state of affairs certain recommendations appear to be adequately evident. First, what is needed is a chain link of a real financial stabilisation that is liquidation of the overgrowth of the sphere of financial services and lowering the real rates of service charges on loans to 2% to 3% at maximum 5% inflation. Otherwise, the capital formation in the production sector and keeping its competitiveness are impossible, and all the speculations and legislative acts on medium- and small-sized businesses would remain nothing but well-wishing. While bringing order to the banking system it would be useful to remember that "morale and intellectual capability of society are in inverse proportion to the amount of interest rate", while this rate in the present-day Russia is a deliberately included element of inflation.

Second, what is needed and possible is strict enough control over the influx and flight of foreign capital to say nothing of "hot money." The issue of "full" convertibility of the rouble and other luxuries of the type of "an international financial centre" should be seriously discussed once again paying greater attention to the nature, character and prospects of present-day moneys. Let's remember that Malaysia introduced restrictions of export capital and became anathema to the IMF coped with the aftermath of the 1997-1998 crisis much better than other victims.

Foreign borrowings and interest rate on them should be minimized by certain measures including regulatory ones, as well as by reducing excessive dollar reserves.

(It is worthwhile to recollect how much many countries lost trying to get hold of their sterling assets in the wake of the post-war break-up of London's financial empire. New York is currently inevitably getting very near a similar collapse)

As for short-term and mid-term prospects it would be preferable (also with an eye to maintaining balanced relations with the West) to have closer interaction with Asian partners emphasizing bilateral and multilateral agreements. It is time to maintain financial cooperation with them. As for energy and transport development programmes (and programmes of development of land and woods reserves) they should be worked out taking into account the fact that Asia has a more stable nature of demand for resources, the presence of dynamic entrepreneurs with connections in the production sector of their economies.

Incidentally, that would be in full accordance with Russia's international obligations. The June 28, 2008 Declaration of the Shanghai Cooperation Organisation reads:"In the conditions of the slowing down of the growth of global economy carrying out of responsible currency and financial policies, control over capital movement and ensuring food and energy security acquire especial importance."

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