Tuesday, February 23, 2016

Russia's crazy central bank policies are creating havoc

To read the western press, Vladimir Putin is pursuing policies that are so far off the charts, he might as well be considered a madman.  And yet, when it comes to economics, his policies are so relentlessly conventional (in the sense of Harvard / U Chicago conventional) that his economy is suffering quite unnecessary self-inflicted wounds.

This makes no sense whatsoever.  Here is a country that is quite boldly taking on the USA military industrial complex and the whole imperial State department.  "Serious" folks are talking about a threat of a new Cold War if not another nuclear standoff.  And yet when it comes to standing up to the banksters and their ideological whack jobs, Putin is a pussy-cat.  To watch his economy careen from one disaster to another, you might wonder if he isn't somehow on the payroll of Goldman Sachs.

This paradox has not gone unnoticed.  Here we see an outsider, Jon Hellevig, and a Russian, Sergey Glasyev, both making significant criticisms of the absurdly bad job Russia's central bank is doing.  But so far, Putin is backing his crazy central banker.  Go figure.

Absurd Central Bank policies deepen Russia’s recession

Jon Hellevig, 19.02.2016

The policy of the Russian Central Bank of maintaining the punitively high key lending rate is truly mind-boggling. First, they declared that they do it for the sake of inflation targeting but then there were indications they do it to uphold the ruble exchange rate.

The policy is no good for either of the purposes. If it were any good, they would for sure let the rate vary with the changed market conditions. This has not happened, the rate has been the same 11% since August 2015 although the currency value has since dropped by 20% and inflation has gone down by more than 6% from the levels of 15.5% to the present 9.5%. Keeping the rate stubbornly at 11% is no policy but a panic reaction showing the Central Bank is as stiffened with fright as its rates.

Inflation has fallen to 9%

The government has admitted and even the Central Bank seems to do it, that inflation will by end of February fall to below 9%, while it still was 12.9% at the end of December having hovered at levels of 15-16% for most of last year. Actually even reporting these figures betray a fundamental error in their thinking, which is the fact that they stare at the historic rates of accumulated inflation for the past rolling 12 months. It is of course nice to know, but the interest rates are not set to cover past periods, they are set for the future going forward so naturally you should set them in relation to the future predicted inflation. Usually inflation in Russia is highest in the winter months and drop to zero in the best harvest months of the summer. Considering this, the expected inflation could be as low as 6%.

The Central Bank argues that the devaluation of the ruble following the crash of the oil price causes inflation pressure, as imports will cost more in ruble terms. Of course, this is partially a valid argument, but the bank does not seem to realize that the imports themselves have become very low. In January 2015, the imports were down a further 18% from last year’s 41%, total down 50% from 2014. The import volume was in 8.1 bln USD, which is less than 2 times the value that tiny Finland imports with a 30 times smaller population. (All figures without CIS). With these super low levels, the imports do not any more affect the general price level.

The charade that Russia has not diversified

This betrays an interesting fact about the charade that Russia has not diversified its economy. How is that, not diversified when the country with 150 million people with a standard of living fit for developed countries live and function practically without imports? Russian industrial production is slightly down over the two years of crisis, but this is within the big frame of things only a small decrease, which merely reflects the slightly lower consumption. By and large, all the industries are functioning and developing, and this with minimal import inputs.

Obviously, the Russian economy is diversified, to a very big degree. The absurd claim that it would not be diversified is derived from something else namely, the fact that Russia’s exports are not as diversified as one would wish for. Having a diversified economy and having diversified exports are quite different things. – By the way, very few countries in the world have a diversified structure of exports. – And it is only natural that the first 15 years of Russia’s economic recovery has been devoted to satisfying the domestic needs, in due time the economic actors would then turn their surplus towards exports.

But the low levels of imports also reveal that the purchasing power of Russians have plummeted, the Central Banks interest rate policy has really managed to suffocate the economy.

The Central Bank wants Russia to diversify, but does not want to finance it

Interestingly, Elvira Nabiullina, the Central Bank governor, recently defended her policies with what sounds as wisecrack saying that the best way to support the ruble rate would be to diversify the economy by reducing the dependency of oil. This begs the question, how does she think that (further) diversification could come about when she keeps the rates at that punitively high level?

The Central Bank has also defended their misguided policies by saying that a more lenient interest rate policy would fuel the market with cheap financing that would end up in currency speculation. Nothing could be as wrong as this. The Central Bank could easily put a stop on currency speculation by setting limits on the speculative currency positions the banks and their clients can maintain.

In what seems as an endless list of wrong assumptions that the Central Bank is making, one is the very nature of inflation. They seem to think – in accordance with the neoliberal theology – that it is all a question of monetary liquidity, while in fact inflation is at least as much a function of the supply side constraints. The less competition and product offers there are on a market relative to the demand, the more expensive the products become. This should be something which any adult person intuitively understands, but if the experts of the Russian Central Bank do not understand it, they could at least look at the US and EU experience. The central banks of those countries have run for a decade now extremely lenient interest rate policies and have been flooding the markets with liquidity, and yet the inflation there remain at historical low levels at a few percentages. This is because they have an oversupply of production (and cheap imports to compete with).

The deposit rates must be at the level of inflation, must they?

In one of her policy speeches (September 2014), Ms. Nabiullina motivated her high interest rate policy with this statement:

As a rule, inflation sets the lower level of rates on loans, because it sets the lower level of rates on deposits. If we want commercial banks not only to allocate money issued by the Central Bank of the Russian Federation, but to be market institutions and financial intermediaries (which is the essence of banking), we cannot ignore this. Households and businesses will not bring their savings to banks, if the interest rate does not even cover inflation.

“Households and businesses will not bring their savings to banks, if the interest rate does not even cover inflation.” – This is very interesting in view of the interest rates that Russia’s virtual monopolist, the Sberbank – of which the CB is the majority owner – offers. At no point during the two-year old financial crisis has Sberbank offered deposit rates anywhere near a level that would cover the inflation. Presently their highest rates are 7.5 – 8.5%. Oh, wait a minute, but that is the present real running rate of inflation, the one that the CB ignores. This gives us only two possibilities, either the Sberbank fails to give the rate prescribed by the theory, or they give the correct rate while the CB goes way beyond it.

Let’s look at that theory lesson from another point of view. The CB argues that the financing they give must be at least as high as the inflation rate so as not to discourage depositors. In actual fact, it is not so, for sure the CB rate must be commensurate but it does not have to be the same, rather it must be a bit lower. Certainly wholesale money (CB) must be cheaper than retail money (deposits). Here the Russian CB could again look at the US/EU experience, clearly those central banks maintain key rates far below the inflation.

By this analysis, the correct level of the Central Bank key rate at the present time should be around 6 to 7%, or a couple of percentage units below the measured inflation.

Presently the Russian economy is in a very dire situation being buffeted from three sides: sanctions, oil price, and the Russian Central Bank. We cannot hope that the two first mentioned will do anything to alleviate the situation, but the CB must try. One thing is for sure, the punitively high interest rates will do nothing for the ruble value, which is determined by the two first ones, and by speculation.

The business tycoon Oleg Deripaska has joined the growing chorus calling for the Central Bank to come to its senses. The best hope would be for a groundswell of opinion to reach the decision makers. more

Sergei Glaziev: The full extent of economic manipulations in Russia.

February 15, 2016

Source: https://www.youtube.com/watch?v=HPzNS7DxrVk

Translation: Eugenia

ANCHOR: Good evening. Here in our studio this Friday we have the member of the Russian Academy of Sciences Sergey Glasyev. Sergey Yurievich, welcome. Thanks very much for finding time to come here. I have heard that you have to use metro to reach us.

GLASYEV: It is a perfectly good means of transportation. The only reliable one.

ANCHOR: Do you have to use it often?

GLASYEV: All the time.

ANCHOR: Do people recognize you?

GLASYEV: Not really. People now are careful to minimize contacts in order to avoid catching the virus.

ANCHOR: That is true. Let us turn to our financial/economical subjects. Is it necessary to introduce extraordinary measures in the economy as the bankers asked to do – they called them emergency measures? Or, perhaps, something similar to the term Hollande used – the state of emergency in the economy?

GLASYEV: I think in the economy one needs to use reasonable measures, because what is happening now, particularly in the financial sphere, causes bewilderment: often lots of merriment in our enemies, but bewilderment in experts. In our situation, with the ruble being the most secured currency in the world – let me remind you that our currency reserves exceeds two-fold the volume of rubles in circulation – with ruble as the most undervalued currency in all G20 countries, for our purchasing power parity is almost three-fold higher than the exchange rate, and with trade surplus, to experience such jumps in the ruble exchange rate, it is impossible to explain. What is this done for?

Of course, there are hypotheses, suppositions, and opinions of the market participants that the ruble exchange rate is being manipulated by unscrupulous traders, but unscrupulous traders do not just appear out of thin air. This happens because the Central bank fails to fulfill its constitutional obligations to provide for the stability of the national currency, and as a result of that today we have canceled many investment projects, and business people lost directions, because nobody knows what rate to expect tomorrow. In such conditions, it is impossible to plan for the business activity, or invest, or trade in rubles.

For 7 years, I have been studying the Eurasian integration. I can state that the process of the Eurasian integration has never suffered such damage from any factor as it does now from unpredictable fluctuations in the ruble exchange rate. We were developing quite successfully; we were making plans to make ruble the reserve currency; we were trying to convince our partners to trade in rubles. And now the process received such a shock, as a result of which our partners no longer want to hear about trading in national currencies. They started to separate themselves form us, because they think that depreciation of currency is employed to gain unfair competitive advantage. Although we know that the depreciation was unplanned. In fact, it happened precisely because the Central bank dodges its key obligations.

However, since this is happening, it means someone is benefiting from these events. The profitability of currency speculation is enormous – about 80-100% – so, some people make tens of billions on this. Players on the market have a pretty good idea who these people are.

ANCHOR: Do you mean citizens of the Russian federation?

GLASYEV: No, not just our citizens. You know the story about the Deutsche Bank that is now under sanctions from the United States, and the US Justice Department even announced an investigation based on suspicion of manipulation of the ruble exchange rate. The whole world is looking with astonishment on this puzzling experiment of reanimation of the archaic policy from 19th century, but then, at least, there was gold, which functioned on the marked spontaneously, to a certain extent. But today everything is regulated. What is happening is destabilization of the foundation. Our President said at the forum “Foundations of Russia” that we must not destabilize the foundation of our economy. The ruble rate is the load-bearing wall of the economic structure, and every fluctuation in the ruble exchange rate is similar to an earthquake.

If we use an analogy of a house: we are building our collective economic house, but in the foundation, mines constantly explode, and we know that people that cause these explosions collect super-profits as a result, whereas the security service, whose job it is to make sure there are no cracks in the foundation, pays not attentions to these explosions. That service pays no attentions to gigantic cracks, into which the whole brunches of the Russian economy have sunk, which stopped developing, stopped investing precisely because fluctuation of the ruble rate 5% a week – this is unheard of even for the oil-producing countries that dependent on oil export more than we do, but even there the exchange rate of the national currencies did not drop more than 12-15% total. Thus, every jump in the ruble rate is an explosion in our foundation, its slow transformation into sand, on which nothing can be built.

ANCHOR: It is understandable that some of the players on the market would want to make money on the ruble fluctuations, but do you think that there might be someone bugger, our geopolitical adversary, perhaps, that could profit from this situation, particularly considering that we see openly hostile actions? For example, accusation against our President – this is a clear demonization.

GLASYEV: Clearly, this is all in the interests of our enemies that applied sanctions against us counting precisely on such policies. Please, note that sanctions were applied at the moment when the transition to co-called targeting of inflation was announced. This is a pure myth, because the method of “targeting”, which let the ruble free float, led to the exactly opposite results: inflation did not decline but increased two-fold. And the Americans with their sanctions counted that there would be exactly such policy: the Central bank would leave the market, thus allowing the speculators to take control of the market. If the Central bank had stayed on the market as a stabilizing force, no speculator, even with the big money from abroad, would have been able to do anything considering the ratio of our currency reserves to the circulating ruble mass. Thus, to make the economic sanctions against Russia effective, first thing to do was to convince our financial authorities to abandon the currency market. After that, the currency market fell into the hands of the speculators.

I want to emphasize that during the past decade non-residents, i.e. foreigners, stably dominate our financial market: approximately 3/4 of all operations in the currency-financial market are performed in the interests of non-residents. In the currency segment, which is dominant today, in certain periods the proportion of non-residents reached 90%. Note that the American sanctions do not apply to the speculative capital. They apply only to the long-term loans that cannot be given to our country, but as far as speculators are concerned – no problem, take a 30-day loan, speculate to your heart’s content. Considering that along with the ”targeting inflation” what also happened is that Moscow stock exchange was sort of semi-privatized. Today, speculators are in charge there, and they, judging by many indications, stimulate the speculative fluctuations using all sorts of credit instruments, very likely using insider information. Therefore, Moscow stock exchange today has turned into the main source of profit in the country that performed operations exceeding two-fold the country’s GDP and 5-fold – the volume of export or import. The economic activity in the country is declining, whereas the volume of the stock exchange operations grew almost two-fold. Moscow stock exchange is now the main source of profit in the country. The banks siphon the money there taking it away from the real economy, where the profit is 5-7%.

ANCHOR: Unprofitable to invest.

GLASYEV: Unprofitable to invest and with such fluctuations of the ruble exchange rate, how could anyone plan the business activity? Conversely, the fluctuations are the source of profit in the stock exchange. What is death and cessation of investments for the real economy, for the speculator is a godsend. Profit there is 60-80%. It is not shown openly; the profit, via pseudo-deals is transferred abroad into offshores. The payers show losses, although in reality they collect 60-80% profit. Since the Central Bank does not stabilize the situation, the market is controlled by a small number of players with access to unlimited credit and, thus, with enough money to manipulate the market. That was what the economic sanctions were based on: that exactly this kind of policy would be adopted, which, in the conditions of disconnection of the Russian financial system from the sources of long-term loans, would first create high demand due to the need to pay off the external loans of our corporation and, then, completely take all the regulatory instruments away from the government in favor of manipulators acting in private interests. I can assure you that nothing like that happens anywhere else in the world, for all these events would have long become the subject of investigation and very tough measures.

We have had many discussions with former leading financial regulators from Japan, Europe, and the US. They give recommendations and claim, and this is supported by calculations, that it would be possible to stabilize the ruble, prevent speculations and organize investments. But you would agree that after December of last year when rubble lost its value several fold – and the experts speak about deliberate irregularities in the functioning of the stock exchange that provokes this drop – OK, the drop happened, but what prevented from stabilizing ruble at that level? We now returned to the same level, but we could have avoided all these gigantic fluctuations; the business would have calmed down; the real sector of the economy would have acquired new criteria of competitiveness, since after the devaluation it became more competitive; we would have obtained stability and today would be experiencing economic growth.

Not just our calculations but also recommendations of the business circles, say, of “Business Russia”, “Foundations of Russia”, suggest that we today could grow, grow at least 10% a year.

ANCHOR: Sergey Yurievich, this is most interesting. Let us talk about how we could transition to the rapid growth situation. But before we talk about how to initiate growth, please, say a few more words about the Central bank. The President said, and I am quoting:” I would like to emphasize that the Central bank is by law an independent institution with it own sphere of responsibility”. We have several questions from our viewers. One question: “ If the Central Bank knows everything, why is it doing nothing? Who profits by this inaction?” Such talks that, supposedly, the Central bank is independent, which was also mentioned many times by the President’s press secretary with the reference to the Constitution, do they suggest that there is no way for us to influence the situation?

GLASYEV: Of course, we can. There is a law about the Central bank that determines how the leadership of the Central bank is appointed: it is a democratic open procedure. The President proposes candidates to the board of directors, and the State Duma confirms them. Yearly, the general directions of the unified state credit and monetary policy are discussed at all levels of the government. Thus, the Central bank is one of the state regulatory institutions; it does, of course, have a wide autonomy but at the same time it is supposed to act in accordance with its obligations determined by the law. I am guilty of having participated in the writing of the law about the Central bank at some point, although not all our proposals were incorporated. For example, since the Central bank is responsible not only for the currency exchange rate but also, as everybody understands these days, for the interest rates as well as for the bank oversight and regulation of the financial market. All these functions are determined by the law.

But the fundamental function is the stability of the national currency. This is even written into the Constitution and for a good reason. Nobody has ever doubted this function: it is indeed the main job of the Central bank as it is the key condition for the economy is stability. The stability of the macroeconomic situation rests on the stability of the exchange rate, particularly for such an open economy as ours. The main issue is not whether the Central bank is independent, dependent, or half-dependent. The problem is the lack of the mechanism ensuring that the Bank fulfills its functions. The Central bank can interpret the law as it wishes, and that is the problem.

Another problem is its function as a financial regulator. Five years ago, the Moscow Stock Exchange was completely under control of the Central bank. At that time, to imaging that speculators could have manipulated the ruble exchange rate to such an extent was impossible, because the Central bank regulated the Stock Exchange. There exist 101 methods how to stop the speculative agitation. I would like to stress that neither in December of last year nor at any time later none of these 101 methods was employed. The large credit levers are still in place; the Central bank itself permits refinancing of speculative operations; it also creates new channels of refinancing of speculative operations such as cross-currency Repo. The Central Bank uses none of the widely known across the world methods to stabilize the financial market in case of agitation, and 5-7% fluctuations are considered agitation. Any financial regulator in any country would interfere in such situation, even stopped the trading. It seems that financial operations were on purpose given away to speculators that make deals among themselves, drive the currency to the bottom, collect profits, sell the currency, let the rate go up, pick the right moment and start the drive down again. Nothing good comes out of these swings, because every drop in the ruble exchange rate hits the prices causing the waive of inflation but when the ruble comes up again, the prices do not go down correspondingly. That is why every drop in the ruble value translates into an inflation waive, whereas the rise in the ruble exchange rate only hits the competitiveness of businesses that cannot adapt to these rate fluctuations.

ANCHOR: What about the frequent talks that we could benefit from a low ruble value by starting new industries, although it is unclear where is the profit, because we import machinery, spare parts, etc. We also mentioned that because of the sanctions we do not have access to loans, but we are still repaying old loans without the ability to refinance. It appears that the internal credit is also problematic.

GLASYEV: I would like to return to the statement of our President about the fundamental conditions for the macroeconomic stability. What is a fundamental condition? If we compare the economy to a building, the main thing that an engineer should accomplish – and the financial authorities are engineers on the financial markets – is to make all load-bearing elements sturdy enough. So, the stability of the ruble exchange rate is the key load-bearing structure of the entire macroeconomic building and its foundation, as I have already said earlier. One important issue is proportion: what should the rate be exactly? There are certain economic rules to follow: it is bad when a currency is overvalued, since it negatively impacts the competitiveness of the national business, but it is also not good when it is grossly undervalues, because it prevents effective participation in the international division of labor. You were correct to note that import of technologies becomes too expensive, and the countries lagging behind technologically are highly dependent on import of machinery and technologies (we, unfortunately, today import about 60% of industrial machinery). Therefore, when the ruble drops too much, import of technologies and machinery becomes impossible. But the worst situation is when the ruble swings widely from one red zone to another, which, as I said earlier, equals an earthquake, when the main load-bearing structure destabilizes the whole building.

Let me stress one more time that, considering our resources, it would be a simple matter to stabilize the ruble. It would be so much easier than, say, come up with a strategic plan or discuss and develop, together with the business, indicative plans. Most importantly, we have all the means. But what is happening today, particularly, in view of our dependence on swings in the external short-term speculative capital and considering offshorization of our capital, it look like our “building” is shaking, it foundation is destabilized, the main load-bearing structure swings with super-wide amplitude, all windows are broken, but we keep heating the building. We have lots of heating oil, lots of building material, skilled builders but instead of fixing the building we are sitting and waiting for the good weather, when the Western investors come to us again and help us stabilize the macroeconomic situation, and then summer will come and everything will be well. That is what it look like, an analogy.

ANCHOR: There is also that word – innovation that are supposed to save us.

GLASYEV: Innovations require long-term planning. The program of measures proposed, for example by the Stolypin Club in the name of the business and scientists, is well developed from the engineering and financial standpoint being based on the today’s understanding of the laws of the economy and finances (similar to the material resistance law in the construction industry). Clearly, if we want to rebuild our economic building, we have to make investments profitable. Without that, we will not be able to repair the load-bearing structures or renovate other elements, or even replace the windows.

In the condition when the interest rate exceeds the profitability of the industry 3-fold, all our excellent workers will not be able to make ends meet, and no investments are possible. Therefore, the key proportion in the economic foundation is that the interest rates should not be higher than the profitability in the industry. If the do exceed the profitability, and today it is a 3-4-fold excess for the market interest rates, it means that if someone take on a loan, then in all probability he will not be able to repay it.

And the banks understand this quite well. That is why they either stop financing the industry altogether and turn themselves into raider offices that simply reposes the property of healthy businesses unable to keep developing in today’s circumstances, because in the industry half of the working capital today is covered by loans. So, when the Central bank increased the interest rate several fold, all enterprises that took on loans to keep their production going immediately ran aground. To keep the production going with such interest rate would be to incur losses, which would be pointless.

If we want to build solid macroeconomic foundation, we must, as I have said many a time, first stabilize the ruble and, second, reduce the interest rates so they would not exceed the profitability of the industrial sector. But we also have to take care of the broken windows in out building, so that the heat we are producing for our economy would not escape through the openings. For that, we need control of the use of money specifically for the intended purpose; we need selective currency regulation including restrictions on speculations, prevention of manipulations of the financial market, suppression of the attempts to destabilize our financial market as a result of uncontrolled cross-border operations. When we will have achieved these basic necessary conditions for the macroeconomic stability, we could achieve the economic growth, the potential of which is no less than 10% a year.

ANCHOR: Sergey Glasyev – we sill continue after the news. Sergey Glasyev: the second half of the hour. Today in the studio we are talking about the economy and the situation in our economy. Let us talk about the growth. The government is developing a new anti-crisis plan, as they call it. First, it is unclear what is wrong with the old one, for which the praised themselves at the end of the year. Second, this one contains words “structural changes in the economy”. Is there hope that these words mean something similar to what the economists from your camp have been talking about? Do you think that the small business will save us? We have started to talk about the nonexistent investments. If everything remains as it has been, what will happen to the economy, to our motherland and to us?

GLASYEV: In the absence of the macroeconomic stability, in the situation when the economy is shaken all the time, our economic foundation is turning into ashes. There could not be any constructive anti-crisis policy – any measures will drown in this quicksand. Take an example of 2007. Almost 2 trillion rubles were distributed to the banks, and the banks simultaneously increased their currency reserves approximately by the same amount. This means that the money went to the currency market and abroad. The banks earned, approximately 300 billion rubles in super-profit, whereas the real economy dropped by 10%. The GDP as well as the industrial output declined to a worst extent that any other of the G20 countries.

The economists like myself do not form any camp – they are just normal scientists that live and work for the real knowledge, for the truth. Conversely, those that do belong to a camp, a camp of the speculators – they have praised that policy as if it had been the most effective anti-crisis policy. But in reality it turned out be an abject failure, and we did worse than other G20 countries. The efficiency – the ratio of the amount of money spent on the anti-crisis measures to the macroeconomic outcome – only Ukraine faired worse, which does not belong to G20 anyway.

Now let us look at 2014-2015. In 2013-2014, when the ruble exchange rate started to jump in connection with so-called “targeting of inflation”, a considerable amount of money was spent. But spent how? If the real sector of the economy borrows at the interest rate of 18%, the commercial banks competing on the market can borrow at 11% from the Central sank, whereas there exist organizations that can borrow at 0.5% or even 0.1%. So, when the critics of our program state that we would not be able to ensure the goal-oriented regulation of the money distribution, it sounds absurd, because the regulatory situation when some borrow at 18% while the others at 0.1% has nothing at all to do with the market or liberal economy. This is pure Middle Ages, with monstrous degree of arbitrariness and outrage. Whoever is closer to the table, gets more. We need sensible rules equally applicable to everyone.

I have already talked about the basal constructions. Now I would like to say a few words about the development strategy. When the scientific proposals are treated as if they represented a return to the old system of direct planning, it is a total nonsense. Our opponents are constantly trying to muddle the waters without presenting any arguments. In reality, the development strategy that the country needs today would inevitably have mixed features. We have a small group of modern sectors where we are still at the most advanced level, such as the space industry, the atomic industry, to some extent, the aviation industry. Note that these are all technologically advanced sectors where the price of 1 kg of a product could reach $10,000-15,000, not like in the oil industry where it is just cents. Therefore, every percent of the growth in these sectors translates into 10 or more percent growth in related sectors.

That is precisely what we are talking about all the time: innovations, scientific and technical advancement that are responsible these days for 90% of the economic growth. In addition, we have segments where we had been world leaders for a long time, such as the stem cell technology, which has been discovered in the Soviet Union. These technologies are now widely used in medicine, which is experiencing a real revolution. The rate of introduction of bioengineering technologies in the industry is about 35% a year. In general, new technologies are being implemented at the rate of 20-80% a year, depending on the sector: nanotechnology, bioengineering, information-communication technologies. We have people that know hwo to do this. The problem is they emigrate: we lose more than half of college graduates with majors in molecular biology or gene engineering; up to two thirds if we include graduate students. Visit the Moscow University, and in any relevant Department you’ll see ads from Apple, Microsoft and such. They hire our people on the spot. Why do our people leave? Because here we lack the mechanisms of financing the research and development. As you know, in the Silicone Valley Russian is the second language. Our problem is not the dearth of ideas or projects but the absence of financial, economic mechanisms for the implementation of these new technologies.

In those areas where we have an advantage, we need the strategy of the outpacing development. The world is now shifting into the new technological era. The race is underway: what will happen first, the disproportions associated with the old technological state hit the developed countries in the form of financial bubbles, unemployment, capital loss, or they manage in time to build up the conditions for the economic growth. We can now observe the beginning of economic recovery in the developed countries.

ANCHOR: You do not think this is recession in spite of the decline in the oil and metal demand?

GLASYEV: You know America grows by about 3%, Europe – by 1.5%, China is reforming itself on the go all the time. Thus, the new technological order that is growing by about 30% a year is today making an impact. It is becoming the engine of the economic growth. But we, on the other hand, do not in reality pay attention to either strategic planning or long-term investments in these advanced technologies. While we do have academic science, we are busy reforming it instead of giving our experts the opportunity – in other words, give them cheep “long” money, so that we could experiment, create and use new technologies here. We need to help them with subsidies – of course, not at 18% interest – with such interest rates new technologies could not be produced. We need differentiated mechanism of financing for 10-15 years. We have already missed the opportunity to rapidly jump onto that new technological waive.

Let us see here. We were first in the laser technology but today we cannot still mass-produce light-emitting diode, although this is our technology. About nanomaterials: we are still stuck at the laboratory designs we made 10-15 years ago. Therefore, the state does not function as a state of development. But considering that we are living through the transitional period to a new technological level, the state must become the state of development. Thus, the first strategy is the strategy of the “outpacing” development of the industries and technologies representing the new technological level.

The second strategy is the strategy of dynamic “overtaking” in areas whether we are close to the leadership level but are still lagging behind due to inability to assemble the entire technological chain. We don not have the production capacity for all components. Here we have to supplement our own production by the import of technologies, by purchasing patents, experimental models, licenses, and so on. The civil aviation would be a good example of such sector: in that area, we are lacking only some elements, mostly due to the low level of production and worn out equipment.

Finally, the third strategy, which is quite well known, is the development aimed at simply catching up. It is when we simply invite foreign investors to come with their own technologies. Like, for example, what is called today “the industrial car assembly”.

Therefore, the strategy should be mixed: it should include “outpacing” development as well as “overtaking” and “catching up”. These strategies require appropriate credit mechanisms. Monetarists think that money equals golden coins. That is how they regard the money, and that is why they think the smaller amount of money circulates, the lower the prices, the same as with any product. Our financial authorities have an understanding of the money matters at the level of 18th century, totally backward, having nothing to do with the reality. Credit is the mechanism of promoting the economic growth. The economic growth since the 18th century happened when the states invented the credit, managed to squeeze out the usurers form the financial market and gave the industry the opportunity to obtain “long” long-term money. Naturally, there has to be a balance. Obviously, money should not be simply given away or dropped from the helicopter, as some did.

ANCHOR: The President also said no to simply giving away the money.

GLASYEV: Our program include the goal-based regulation of the money, creation of the long-term credit via the mechanisms that will not not just control the money movements with the help of the institutes of development but will be coordinated with the strategic and indicative plans. What we refer to as “strategic and indicative plans” is not the same as the old centralized planning. This is a collective creation of the business, science, and the state, with the state acting not as a dictator but as a coordinator.

ANCHOR: Two-minute news brake, and we will continue. Sergey Yurievich, there are many questions. You have mentioned the rescue of banks by the state and gave examples from our recent past when the government rescued banks, state-owned or not. The story with the mortgage-holders came to the forefront recently: people go out and block streets in protests. The society is divided: some say that those people chose to take on foreign currency-denominated mortgages, so it is their problem. Peskov (the President’s press-secretary – translator’s note) said that here there is no simple solution, and we have to move carefully. How can we solve the problem for the citizens of the largest country on earth, the country riches in the natural resources, so they would not have to repay their mortgages, in dollars or in rubles, for centuries? So that everyone would have a roof over his head? Could we do that?

GLASYEV: The state can only be responsible for things it controls. Our state does not control the dollar emission, so it cannot respond for dollars and euros. That is why the decision to stop giving lending in foreign currency was correct, albeit belated. However, since that was permitted, and people believed the state that the ruble exchange rate would be stable, which was the obligation of the state, the state should pay off its obligations, i.e. convert these mortgage obligations into rubles based on the exchange rate that was promised. This is my opinion. The stable exchange rate was promised, and I do not see why law-abiding citizen should suffer just because the Central bank simply removed itself from the financial market. The law-abiding honest citizens that believe in our government are suffering.

I would like to return to the planning mechanism, to round up our conversation about the program that we have developed in cooperation with the business and science within the framework of the Stolypin Club and are now offering to the society. The key is the partnership between the private and the state sectors. Business would develop its potential, find, with the help of science, the opportunities for the breakthroughs, modernization and increase in productivity. The state must, as a part of this social contract with the business, guarantee the stability of the macroeconomic conditions, i.e. the ruble exchange rate, interest rates, taxes. The state should also provide long-term credit with reasonable interest rates. In exchange for that, the business should take on the obligation to increase the production of the products that are in demand, for example, within that program of the substitution of import that we talk so much about and that has a potential to increase the economic output by about 3 trillion rubles. The business should also take care of the modernization and increase in productivity. All of this should be cemented by a contract between the state and the business, and each side should fulfill its obligations. In such situation, increased loan availability to the industry will result in the increased output, increased productivity of the economy, and, consequently, lower prices.

The real way to fight inflation is not to reduce the money mass, which leads to the deterioration of the quality of money, as we have seen in the 1990s. Anyone familiar with the economic practice would agree that the sure way to fight inflation is to reduce expenses, increase productivity, develop new technologies, and increase the production output. Our dialog with the business has demonstrated that today our business community is ready to take on the responsibility to increase the industrial output by at least 10% a year and introduce new technologies.

ANCHOR: Ten percent a year?!

GLASYEV: Let me emphasize that as far as resources are concerned this is perfectly realistic. We are using today on average 50-60% of our industrial capacity, and the higher the technical level the lower the percentage. Recession we are witnessing today concerns the new sectors, i.e. the enterprises with the modern technologies experience the sharpest decline in production. We have no limitations in resources: we produce ten-fold less of the finished product per unit of raw material than, say, Europe does. Thus, our resources permit us to achieve such rate of growth. We also have unlimited labor resources, for we have hidden unemployment and suboptimal use of the labor resources. We also have access to the large labor reserves of the Eurasian Union. The catastrophe in Ukraine produced a significant influx of qualified knowledgeable people willing and able to work.

ANCHOR: Do we face any limitations in terms of time?

GLASYEV: Well, the new technological model is now expanding. In the developed countries the production is increasingly organized based on novel technologies, i.e. the true technological revolution is taking place. The experience accumulated over the past 200 years show that the window of opportunity to make a breakthrough opens precisely at the time of the shift from one technological level to another. At such time, the old structure stops expanding; the search for the new technology is underway; new technological trajectories are being formed. The countries that happen to be first to come across these trajectories rise upon the waive of the economic growth. Such a long waive known as Kondratiev waive is today entering the growth phase.

ANCHOR: World wars, in which phase of such waives do they occur?



GLASYEV: The time when a shift in the technological paradigm occurs is also the period of geopolitical tension and struggle for the leadership. The sanctions against our country are a clear attempt of the USA to solidify their dominance in our part of the planet. In the 1990s, they have decided that we were their periphery, and from the macroeconomic point of view we indeed were their periphery: offshorization, external dependence, the share of the external credit all point to us being at the periphery of the American economic system. They want to keep us that way. That is why the economic sanctions are directed against the independent policy of our President and are aimed at keeping us at the periphery of the American economy, at preventing us from developing and gaining independence. Obviously, if we do not alter our economic policy, if we do not chose the development strategy I talked about, the strategy encompassing the activity of the business, scientific achievements of our country and the state activity in the area of indicative planning and credit policy with the flexible control of the proper use of the money, then we will not be able to maintain the independent policy in other areas for much longer. Obviously, no one can be independent without strong competitive economy.

ANCHOR: Including the military sphere.

GLASYEV: Naturally. The technological revolution touches the military-industrial complex as well. That is precisely why the geopolitical tension goes up in such periods – because in the liberal-democratic model, the state has the right to interfere with the economy solely to ensure the defense capabilities. The shift of the technological formations always occurs via the arms race. Unfortunately, that is how it has always been so far. We could, of course, oppose that and propose a program of inclusive international cooperation in the scientific and technological spheres, for example, protection of the earth from the technogenic threats and catastrophes. We did propose to refrain from placing weapons to the orbit in cosmos before the sanctions but the Americans went on the warpath.

They went on the warpath, because the war allows them to maintain their control over the periphery. The today’s war is hybrid in nature: the most important front is the currency and finances. The main goal is to enhance the control over the periphery but, if that fails, to create chaos in the periphery. The next step is to obtain preferences in that chaos, and prevent China from gaining in competitiveness. Thus, the struggle between the old and the new leader is going on – this is a separate subject. I can say that based on the theory of long cycles, there are long Kondratiev waives, the cycles of capital accumulation – we call them not just the change in technological but also in the world economical formation, when the whole system of institutions regulating the reproduction of the capital changes. These periods are very dangerous, because of the struggle for leadership. Today, although that struggle is between the USA and China, they fight for the control over the periphery. We are the key element of that periphery that could potentially become a part of the nucleus of the new world economic and technological order. But for this to happen, we need our own development strategy and sensible modern program of economic growth.

ANCHOR: Just in 10 seconds – what about our future? Do you look with pessimism at the near future?

GLASYEV: I look with optimism, because we do have potential for a breakthrough. Our healthy business generally is ready to take on the task. But for that to happen, the state needs to create the necessary conditions within the framework of the private-state partnership based on scientific recommendations and not leave everything to chance.

ANCHOR: Sergey Glasyev – thank you very much for coming. There are many questions for you on the subjects you walked about. We are looking forward to seeing you again here. Thank you. more

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