What evidence do we have that Putin's economic team knows what they are doing? I believe the most compelling example is that Putin has suddenly discovered the value of a cheap ruble. As someone who lives in a country that regularly ties itself into economic knots in order to maintain the high value of the dollar, this is an amazing development—but one that makes sense. I have been listening to USA Producers complain about about undervalued currencies in Japan, China, South Korea, etc. etc. most of my adult life. Bitching about the high value of the dollar is one of the few remaining signs we still have some Producer Class survivors.
What this means in practice is that Russia is about to look economically a great deal more like Japan of the 1980s. And one of the things they will probably discover is that a very large percentage of their imports are things they could easily produce themselves. Whether Russia has the human resources to pull this off is another matter. A high-functioning Producer Class does not just happen overnight—even IF they have been given economic space to grow by a government that seems to believe in import substitution as a critical element of cultural self-defense.
As regular readers know, I am a pretty serious amateur historian and Russia is a pet interest. It is my contention that Putin is by far the most interesting and imaginative Russian leader of the last 150 years. The historians are going to have a field day with this guy. IMHO, Putin has now passed every leader Russia has ever had save Peter the Great. And the accomplishment of Peter that Putin has yet to match is that Peter was such a magnificent builder. Peter got it. He had actually trained in a Dutch shipyard as a young man. Shipbuilding was arguably the pinnacle of Producer Class accomplishment at the time. Russia was a VERY different place when Peter got done with it. While Putin missed the shipyard training, he still could become the nation's historical master builder if he can jerk the economy back from the neoliberal madmen and create something resembling a Producer State. It IS possible that could happen—after all, he has all the pieces.
The following is an interesting assessment of Russia's economic "reformation" written by a Finn. I make it a habit to withhold judgment about Russia until I have heard from a Finn. After all, these are a small (5+ million) people who have managed to maintain their independence from a massive superpower with whom they share a 1300 km border. And the ONLY way they could do this is to have an extremely clear-eyed view of their neighbor. Not surprisingly, they are the best in the business. Must read.
And yes indeed, Russia is asking itself just how hard would it be to ditch the dollar in international trade. Here a big Russian banker claims that de-dollarizing their trade could be accomplished in 2-3 years. I am not sure it would be THAT easy but it quite obvious that it would be possible and heavy hitters in Russian society are talking about the practical problems of pulling it off.
Putin Makes Compelling Case at Investment ConferenceJon Hellevig RI OCT 3, 2014
Jon Hellevig is a Finnish legal and business expert with long experience in Russia. He writes frequently on Russian politics and economics. Link to bio.
Speaking yesterday at Russia's largest investment conference, Russian president Putin made a compelling case that Russia's economy has not only not been seriously affected by sanctions, but that in fact, it stands to benefit from them.
He dismissed the recent fall in the value of the ruble, stating, as he has several times over the past few days, that Russia would absolutely not institute capital controls, and he argued that the cheaper ruble is in many ways a plus for Russia.
In response to the doomsayers, Putin pointed out that the Russian federal budget showed a net surplus of over 900 billion rubles (about 25 billion USD) for the first eight months of the year. This surplus amounts to 2% of the GDP, which is in stark contrast to the deficits run by all major Western countries.
This flies in the face of the assorted domestic liberal analysts and their Western peers who have been telling us for the last few years that Russia needs an oil price of close to $120 to balance the budget. It was no use trying to point out to them the logical conclusion, which entails from the facts that the Russian budget is denominated in rubles and that the Russian currency is the ruble, which would devaluate in pace with the decrease of the oil price, thus bringing the budget to a new level of equilibrium with a lower oil price. Events have now proved me right on this.
Correspondingly, the devalued ruble rate will increase profits in all other export sectors and thus replenish the tax coffers. Less competition from Western imports will also cushion the domestic sector industries. The battered Eurozone countries can only envy Russia for having its proper currency to enable such adaptation.
Putin stressed that even under these extraordinary conditions Russia will not need to increase the tax burden on businesses. Neither does Russia experience any EU-style cuts in welfare and retirement benefits; on the contrary Russia will continue investing in the social sphere.
There would be a big problem with the ruble depreciation were it to fuel inflation, but so far there are few signs of this. Putin pointed out that as of today the inflation expectations by the end of the year range from 7.5- 8 percent. This is of course high in comparison with what is usual for the Western countries but it is in fact only slightly higher than last year’s 6.5 percent.
The rise of the inflation rate is minor indeed, if we relate it to the decrease of the currency rate at a level of 30 percent. Putin assured that the hike in inflation would be of limited durance.
I agree. A certain period of time will naturally be needed to build up the logistics for alternative imports and for domestic replacement production.
Russia will continue to advance its economy through structural reforms and national programs of developing whole industries like the successful programs in the spheres of aviation, automotive and pharma industries.
To the previous priorities, Putin now added the need to achieve an industrial breakthrough so as to create powerful national manufacturing companies in machinery, technology and processing, no doubt for example in the field of oil drilling technologies.
It is already a foregone conclusion thanks to the contra-sanction of banning Western food imports, Russia will achieve significant growth in agricultural production and food industry.
Putin stressed that Russia aimed to achieve growth in the economy “not through pumping it full of liquidity” or other sorts of financial machinations, but through the structural reforms and targeted investments.
This was a swipe at Western countries, which keep up a façade of economic well-being only by means of massively accumulating new debt and the central bank financing referred to as “quantitative easing”. A recent study has shown that these massive debts in fact hide years of negative GDP growth in the West.
Putin also confirmed that Russia would in fact be infringing on the global hegemony of the US dollar. He declared that Gazprom had recently made the first trial deal of selling oil for rubles. Russia will now ever more actively start using the ruble and the national currencies of its counterparts in bilateral trade with China and other countries. Plans are developing in this vein with all BRICS countries and several countries of Latin America.
Russia intends to dramatically boost trade and investment cooperation with the aforementioned countries as well as those of the Asia-Pacific region at the same time when the Eurasian integration with Belarus and Kazakhstan will be boosted by new entrants joining. First in line are Kyrgyzstan and Armenia.
Finally, it should be stressed that Russia under Putin’s leadership will continue the serious work on improving the business climate, which was jump-started in 2012 after Putin’s reelection.
This work resulted already last year in Russia moving up 19 places to number 92 of 185 countries in World Bank’s “Ease of Doing Business” index of that year. The work on improving the business climate and debureaucratization is a tedious and time-consuming process involving expert work and legislative initiatives on how to optimize administrative processes and remove barriers in hundreds of fields of business activity. The various initiatives will mature little by little over the years. Therefore, this program will not provide for staggering headlines for the business press, but in fact, it constitutes a major reform project, which ranks high in Putin’s priorities. more
Russia could ditch US dollar in 2-3 years – head of Russia's #2 bankRT September 30, 2014
Two to three years would be enough time for Russia to switch to international settlements to the ruble, Andrey Kostin, head of Russia’s second-biggest bank VTB, said.
“Two to three years is enough, not only to launch [settlements in rubles], but also to complete these mechanisms. But much will depend on how banks will cope with the task,” Kostin said in an interview with Izvestia newspaper.
Kostin first put forward the idea of switching to national currencies in international settlements about a decade ago, which means a move to the ruble shouldn’t be considered a counter-sanction measure.
"I did not find understanding in this matter with the previous leadership of the Central Bank [10 years ago ] They believed that since the [US] dollar works, we shouldn’t do anything, and settlements in rubles will just bring additional risks. Under the new leadership the position of the Central Bank changed. I think that soon we will achieve a major breakthrough,” Kostin said.
Creating a national payment system and establishing a domestic rating agency are among other priorities for the bank, the VTB head added.
The media has reported on the possibility of the US and EU widening sanctions to exclude Russia from the SWIFT global money transfer system.
Kostin said the move would become “a point of no return” and that any further dialogue would be impossible if SWIFT was cut off.
“If you look at Iran’s experience, shutting down SWIFT only happens when all relations; political, economic, cultural, even diplomatic, break down,” the VTB boss said.
“I don’t know how [Western] banks could block SWIFT and then expect cooperation in the fight against terrorism and nuclear disarmament.”
However, replacing SWIFT within Russia won’t be difficult, Kostin said.
“We have a [similar] system at the Central Bank of Russia and others. The Central Bank has tested this system, and we can switch to it at any moment.”
He said that domestic payments account for about 90 percent of VTB settlements and won’t be affected. Across the entire Russian banking system the share of domestic payments is even higher, Kostin explained. more