The exchange rate "shock therapy"

Published: January 25th, 2016

Economists at Bank of America estimated that in case of a fall in oil prices to $25 a barrel for a balanced performance of the Russian budget in the current year the Russian government will have to devalue the national currency to 210 rubles per dollar.

If the budget deficit will reach the level of 3%, which Russian President Vladimir Putin called the maximum, the dollar should cost 140 rubles. Unfortunately, it must be noted that the current situation is developing in line with this alarmist scenario. As of January 20, Brent crude has traded on world markets at $ 28 per barrel. And the ruble has updated the historical anti-record of 2014, for the first time breaking the barrier of 81 rubles to the dollar.

However, what is happening is hardly a surprise for the Russian authorities. As recently as mid-January, Minister for Economic Development Alexei Ulyukayev said that his department is developing a "stress scenario". According to that, the cost of "barrels" oil "bottomed" at $ 25. In this case the budget are laid out on the basis of a much more positive macroeconomic indicators - $ 50 per barrel and a dollar exchange rate of 63 rubles.

An arsenal of the tools for rapid response, which is available to the government is small (considering the failure of the policy of economic diversification and import substitution program). First - repeatedly discussed sequestration of budget expenditures by 10%, avoiding that in this situation will hardly be possible. The second - the return to the practice of the Central Bank of supporting the ruble through intervention in the currency market. According economists surveyed by Bloomberg this can happen if our currency will fall to 90 rubles per dollar.

However, to determine the threshold for the start of the operation to rescue the ruble and, consequently, purses of the Russian citizens is not yet possible. Despite the fact that the Central Bank declares its goal notorious "inflation targeting," which certainly goes far beyond the expectations of the Ministry of Economic forecast (6.4%). At a meeting with businessmen at the forum "Small Business national idea?" Vladimir Putin drew attention to the fact that the devaluation of the ruble opens "new business opportunities". The president acknowledged that the weakening of the national currency and entered sanctions against Russia are the factors that have a limited effect on the time that you need to have time to take advantage.

Estimates of Bank of America analysts are purely speculative mathematical calculations, the chairman of the Sharapovs Russian Economic Society, Professor Valentin Katasonov.

- The assumption of such surveys is that the Russian government, in general, will be doing nothing. Even in the case of a complete collapse of the oil market. It will just be meticulously executing the budget estimates, which was approved by the State Duma.

"SP": - If the Central Bank will abandon foreign exchange interventions and will continue the policy of "floating exchange rate"?

- Exactly. Like, if nothing is done, then the dollar will cost 210 rubles. Roughly speaking, it would be like to call on Neglinka (the CBR - approx. Ed.) and advise: "guys, heat it up" - Shock-devaluation of the ruble, "to make ends meet."

The calculation is that the financiers are the bureaucrats, for whom the only important thing is that all the figures came together. And they do not particularly care about the fact that the purchasing power of the national currency, as well as standard of living, will fall at times. However, the formalism is the "disease" not only of the Ministry of Finance, but the whole government. As they say, the budget is made, and the fact that people are starving, it is a side effect.

Economists from the Bank of America just calculated what should be the exchange rate, for the Government to do nothing.

"SP": - This forecast is precarious because it creates the impression that the economic authorities have concluded a disappointing trend in all major indicators, without taking any measures to exit from the crisis...

- Partially it is true. Some experts believe that without delicate pressure from the Ministry of Finance the Central Bank could not lower the exchange rate so drastically.

"SP": - The advisor to the President of Russia Sergey Glazyev argues that the ruble is one of the most undervalued currencies. It is assured with the gold reserves (in the amount of 2 times the volume of money in the economy). Not to mention the American "treasuries", in which we hold about $ 88 billion.

- I agree with the fact that the nominal rate of purchasing power parity is approximately 2.5 times lower. Just because of Central Banks passive position the currency speculators has an opportunity to play on the slide. Until it blocked the movement of capital in both directions (in and out of it), we are vulnerable to speculative attacks on the ruble.

Although in late 2012 the IMF, without advertising, acknowledged that in special circumstances the country can not do without the restrictions on cross-border capital flows. Officials of the Ministry of Finance after summarizing the the financial crisis of 2008-2012, also recognized it. Practically, this means that the ideology of the "Washington Consensus" was given up.

Because it acts as a cornerstone of the policy, which implies the liberalization of capital movements. However, our government still do not hurry to abandon this key dogma. Of all the BRICS, only Russia has no restrictions on cross-border capital flows.

"SP": - How to relate "float" of the ruble and the policy of "inflation targeting," which the Central Bank holds? Is not there a contradiction here?

- We have everything upside down. Because inflation in Russia is not connected with the excess money supply, but rather to a lack of "cheap" money in the economy. We are talking about the so-called "Cost-push inflation".

"SP": - Despite this, foreign analysts advised our emergency monetary authorities to raise interest rates to avoid hyperinflation.

It is a series of "bad advice." It should be understood that the leading international rating agencies are engaged by the limit. To cite an example. December 20, 2015 in Ukraine there was a default Due to unpaid debt to Russia in $ 3.5 billion. This is a classic case described in the manuals of the IMF. I specifically looked as rating agencies have behaved in similar cases. The very next day, they lowered the rating of the bankrupted country.

From the moment of default in Ukraine has passed for a whole month, but no ranking score did not move. In my opinion, this is a frank cynicism and double standards.

"SP": - The Bank of Russia in the calculation of some standard indicators for commercial banks recommends using formulas that use this type of assessment.

- After this question, whose side is the Central Bank on, in my opinion, rhetorical.

"SP": - Today, the dollar broke the mark of 81 rubles. Does the Central Bank is going to intervene in the situation, by resuming the practice of currency interventions?

- There was a survey on this subject among Russian experts. The result is a mean value of 90 rubles to the dollar. So, most of all, the public will have to wait. I do not believe that our economic power will intervene.

It is clear that the collapse of the ruble exchange rate to the predicted by Bank of America analysts parameters will mean social and economic shock in the year of parliamentary elections. I believe that the argument about the level at which the national currency devaluation should intervene on the stock exchange, are imposed by our geopolitical opponent.

Because the Central Bank had to act "yesterday." Because inaction played into the hands of currency speculators and potential beneficiaries of the collapse of the Russian currency.

"SP": - There is an opinion that the devaluation, on the contrary, increases the competitiveness of domestic producers and exporters.

- In our reality, this scheme does not work. This import substitution can not be done without massive procurement of modern equipment, that is, the means of production. In this respect, we are far behind, and dependent on the West. In 2008, some sectors had spare capacity. To date they have been filled. First of all, it concerns agriculture.

Each year 60 thousand machines goes out of service. While the own production manages just a few thousand units. National production and technical base virtually destroyed. Without a strong ruble, we can not engage in import substitution. When we tried to industrialize, the West was constantly putting us the "sand in the wheels" by imposing restrictions on the supply of machines and equipment.

The Russian authorities do not talk about the acquisition of the latest technology. We import everything - cloths, food, toys, cars and household appliances, but not complicated equipment, which is necessary for the implementation of the policy of import substitution.

According to Chairman of the Presidium of the Political Council of the party "Rodina", current director of the Institute of Actual Economics Nikita Isayev says that forecasts of foreign experts should not be trusted.

- Last year, the forecasts of the cost of a barrel of oil and the ruble changed almost every day. It is the same activity which is the Bank of America engaged in. At the same time none of the experts takes responsibility for his words.

In my opinion, the situation is very simple. A "barrel" of oil should cost from 3000 to 3300 rubles. Accordingly, at $ 100 per barrel, the dollar is worth about 30 rubles. With the cost of oil at $ 28-29 per barrel is somewhere a little more than 90 rubles. And we have in fact 79-80 rubles to the dollar. It is the control of the course due to deferred repurchase transactions. This is speculative transactions involving commercial banks.

The second tool is the currency interventions of state banks, which thus reduce the social tension caused by the devaluation of the ruble. Perhaps, too, that the Central Bank will have to join in and abandon the policy of "floating exchange rate".

Statement by Bank of America went to the "piggy bank" of liberal society, which formed the impression calls to the collapse of the economy. The latter is indeed in serious condition. But the Liberals, I would recommend to be constructive. Namely, to offer more concrete measures and not just indiscriminately criticize the government like everyone else doing it this days.

"SP": - Did not they deserve this criticism?

2015 was supposed to be for the government a period of active implementation of economic reforms. Then it could be done relatively painlessly. According to First Deputy Prime Minister Igor Shuvalov, the Cabinet has not made any mistakes. As is well known, "do not mistake the one who does nothing."

2015 for the civil society, experts and political parties should have been a year of objective criticism of the authorities. Personally, I was constantly criticizing the economic bloc in the media for failing. However, the government continued to convince the public that the situation has been under control, and the price of oil will soon return to pre-crisis levels.

Today the situation is fundamentally different. Those who last year defended the government today are beginning to criticize it. Everyone of a sudden, found the strength to openly express dissatisfaction with the policy of the authorities. Even loyal editions began to publish material, which indicated the ineffectiveness of action of Medvedevs Cabinet during the economic crisis.

But now we need less nightmarish forecasts and more constructive suggestions as we get out of this situation. However, society is experiencing a catastrophic crisis of ideas. The same applies to the ruling elites. We saw drooping faces of the representatives of the economic bloc on Gaidar Economic Forum, from the Prime Minister finishing with ministers and heads of profile committees of the State Duma.

They received a signal from the president that cheap oil may be good for our economy. Practically, this means that the president proposes to build on the objective reality and not rely on a rebound in oil prices. But our ministers seem to only know how to distribute the budget flows. Not knowing how to develop the economy without the "petrodollars", which could be invested in infrastructure and support to help economically active population. The numerous "think tanks" just rewrite the previous development strategy, changing only their names.

"SP": - the upcoming parliamentary elections, likely to cause excitement in expert and political environment.

- I hope that through an open electoral process the discussion to find ways out of the economic crisis will be enabled.

"SP": - What are the main points of a real anti-crisis plan?

First of all, you should do the audit and control of inefficient spending in all sectors of economy and public administration system. A single stroke of the pen can exclude about 25% in volume of inefficient spending almost 5 trillion. rubles ща 25 trillion "pie" of government orders. It is necessary to prepare a "restart" of the economy in view of reducing export dependence.

Source: Свободная Пресса