---

Published: February 26th, 2016

President Vladimir Putin of Russia went on record as an opponent of bail-in, the trick of confiscating funds from shareholders and creditors of failing banks, or forcing depositors to become shareholders, back in 2013, when he told German Chancellor Angela Merkel he hoped Europe would not adopt this “Cyprus model” across the board. Now, however, not only are bail-ins sweeping the moribund European banking sector, but Russia’s Finance Ministry and Central Bank are readying bail-in measures for the country’s own banks.

Russia is facing financial pressures that threaten even its most promising economic prospects, the ones related to Eurasian development and integrated investment projects with BRICS (Brazil, Russia, India, China, South Africa). At the same time, the Russian budget and currency crisis offers the perfect opportunity to break with the monetarist axioms that have persisted in hamstringing Russia’s economy since the immediate post-Soviet period of the 1990s, when Wall Street and City of London trainees took over the Russian government. Academician Sergei Glazyev, the economist who fought the monetarist takeover at that time and today is Putin’s advisor on Eurasian integration, has escalated his pointed attacks on Russian Central Bank (CBR) current monetarist policies, and renewed his own proposals for state-guided credit creation.

Officials loyal to bankrupt model

Typical of how Russian government economic institutions are stuck on the practices of the very trans-Atlantic financier circles who are destroying the West’s economies, was the 29 January announcement by Deputy Finance Minister Alexei Moiseyev of impending bail-in measures for Russian banks. He said that “a new mechanism” was in preparation, which “will allow companies and holders of very big deposits … to become shareholders and in a couple of years, if the bank operates successfully … get money”. In other words, bailin. Moiseyev’s claim that troubled banks could turn around so soon was scarcely credible, as the Central Bank moved to revoke the licenses of more banks, including Vneshprombank, one of Russia’s top 40. Two other top-50 banks were among the 100 banks shut down by the CBR in 2015.

In addition, beginning in mid-January—when Prime Minister Dmitri Medvedev declared, “We need to prepare for the worst scenario … to live according to our means, including by reducing budget expenditures, decreasing spending on the state apparatus, and privatising part of our state assets”—Russian officials and economists started debating not only bail-in, but also Finance Minister Anton Siluanov’s demand for cutting the 2016 federal budget by 10 per cent (half a trillion roubles, or US$6.5 billion). Russia continues to operate under a self-imposed restriction of the federal budget deficit to no greater than 3 per cent of GDP, closely imitating the European Union’s Maastricht deficit ceiling, which has been a major driver of austerity against European populations and the economy.

Also under debate are details of the government’s decision to raise cash for the budget by privatising substantial stakes in remaining state-owned giants like the oil company Rosneft, Russian Railways, and VTB Bank. The privatisation plan had been put on the agenda by the government in 2012, but was blocked at that time by Rosneft CEO Igor Sechin and then-head of Russian Railways Vladimir Yakunin.

At his year-end press conference on 17 December 2015, Putin declared that “the peak of the crisis has passed”, yet Russia found itself facing a severe budget crisis less than one month later. The 2016 budget adopted in December had assumed that the price of oil, of which Russia is a major exporter, would average US$50.00 per barrel this year. Budget cuts of 10 per cent presume the oil price will be at least in the US$30.00-35.00 range, although there is no guarantee of that. The rouble came under hard attack in the first weeks of the year and is now hovering at around 78 to the dollar, a 50 per cent collapse since its 2015 high of 50 to the dollar in May, and worse than its January 2015 collapse to 69 after the Central Bank floated the currency in December 2014, along with hiking interest rates sky-high.

Glazyev hits monetarist rules, offers alternative

Academician Glazyev charges that the CBR is promoting speculators, failing to defend the rouble, and thus violating its Constitutional responsibilities. “The purpose of international reserves is to ensure the stability of the national currency—they exist for that very reason”, Glazyev told the official news agency TASS 21 January. “Our international reserves are twice the size of the amount of roubles in the economy; it is easy to stabilise the rouble exchange rate, and it would even have been possible to keep it fixed over the course of the past year.’’ These remarks were highlighted by the Financial Times of London, in an article gloating about the collapse of the rouble and the International Monetary Fund’s projection that Russia’s GDP would shrink by 1 per cent in 2016, driven by falling oil prices. The newspaper quoted CBR head Elvira Nabiullina that she was unprepared to take such action because, she claimed, there was currently no risk to financial stability.

Speaking on 30 January on a Russian News Service talk show, Glazyev charged that Russia’s foreign exchange market is in the hands of foreign speculators. He said that non-residents make Academician Sergei Glazyev presents his book The Final World War, containing prescriptions for Russia’s re-industrialisation through a credit policy, on 20 Jan. in Moscow. Left to right: Sen. Yevgeni Bushmin, Gen. Sergei Stepashin, Glazyev, Izborsk Club Executive Secretary Alexander Nagorny and publisher Dmitri Lobanov. Photo: Neuromir-TV 8 Australian Alert Service Vol. 1108 FNeob. r6uary 201610 FebruaVroy l.2 10816 No. 6 Australian Alert Service 8 three-fourths of all transactions in Russian financial markets, while in the foreign-exchange segment, non-resident participation is as high as 90 per cent. Speculation provides “insane profit margins” of 80 to 100 per cent, he said, against which investment in real production cannot compete.

“Let me note”, Glazyev said, “that the US sanctions do not apply to speculative capital, they relate to only long-term loans, which are banned from being given to our country. As for the speculators—[they can] take a loan for 30 days, speculate all you want. Given that the Moscow Exchange is run by speculators, they bet on fluctuations, using credit leverage and insider information. The Moscow Exchange has become a primary profit centre in the country, which, in the past year of operations, has become two times the size of GDP, and five times the volume of exports or imports, despite the fact that economic activity in the country is falling. They are pumping money to the banks, pulling it from the real sector, where the profitability is 5-7 per cent.”

Glazyev has just released a 500-page book, The Final World War: The USA Is Starting It, and Losing. He presented it at a 20 January Moscow press conference, hosted by the Izborsk Club, an intellectual discussion and publishing group. Joining Glazyev on the podium for discussion were former Internal Affairs Minister and Accounting Chamber head Gen. Sergei Stepashin and Senator Yevgeni Bushmin, a member of the Medvedev-Putin United Russia party.

During the 90-minute event, Glazyev charged that the Russian economy is in the hands of “incompetents”, and that the Chinese model offers a clear and viable alternative, “which we could have chosen”. Glazyev said that it was madness to minimise state investment in the economy on the grounds of a lack of money for this in the budget; that budget spending is not the proper source for investment, but that the Central Bank should create new credit and direct it, through regulation, into the real economy. He noted that Russia’s recently increased spending on the military, at least, has been a net plus for the real economy, driving innovation and preserving industrial capacity.

At the book presentation, Glazyev also pointed to BRICS as representing a better future. But he warned in a 30 January interview with Russian News Service (RNS) that Russia’s trade, including with BRICS members, is being thrown into disarray by the Central Bank’s policies. “I’ve been engaged in Eurasian integration”, he said. “We made plans that the rouble will become a reserve currency, we persuaded our partners to trade in roubles…. Now our partners don’t want to hear about trading in national currencies. They believe that the depreciation of the currency is unfair competition.’’

He concluded by blasting the CBR: “The Central Bank is not fulfilling its Constitutional duty of ensuring the stability of the exchange rate. As a result, today we have halted many investment projects…. No one knows what the rate will be tomorrow. In these conditions it is impossible to plan the conduct of business, or to invest, or to conduct trade in roubles.”

A hint from China

On 17 December, just hours after Medvedev left Beijing at the conclusion of annual bilateral government talks on economic cooperation, the official Chinese news agency Xinhua published a commentary titled “Will Russia withstand the stress test, in this difficult crisis?” The author suggested that Russia’s main problem was not oil prices, but a “structural crisis … the essence of which is the deindustrialisation of the economy”. He concluded, “It does not appear possible to get out of this systemic crisis, without overcoming the disproportion between the development of the financial and the real sectors of the economy, which continues to increase.”

One Moscow specialist in Chinese affairs noted that the article was not a full-fledged official statement, but that its publication in Xinhua was an attempt by China, Russia’s crucial partner in BRICS, the Shanghai Cooperation Organisation, and bilateral economic relations in Eurasia, to support those in Russia who are insisting on a fundamental departure from the remaining liberal free-trade dogmas, adopted from London and New York a quarter century ago and still holding sway. Glazyev’s voice is not an isolated one.

In recent years the Moscow Economic Forum (MEF) has become a regular venue for discussions among Academy of Sciences economists, businessmen, and members of the State Duma (Parliament), of possible fundamental economic policy changes. On 8 December 2015, the MEF held a session titled “A Change in Economic Policy as an Answer to External Threats”, which adopted a document called Charter-2016, on which signatures are currently being collected for overturning the liberal monetarist axioms and practices of the 25 years since 1991.

MEF leader Konstantin Babkin, an agricultural implements producer who fought hard against Russia’s joining the World Trade Organisation, told the session that while President Putin is committed to ending Russia’s raw materials-export dependency, this cannot happen until “market fundamentalism” is overcome. Another session participant was Vladimir Gutenyov, first deputy chairman of the State Duma Committee on Industry, who is a member of United Russia and an official of both the Union of Machine Builders and the League for the Support of the Defence Industry. Like Glazyev, Gutenyov said that the CBR’s main goal should not be “fighting inflation” with interest rates so high that Russian business is suppressed, but to become a real credit-issuing centre, extending credits to approved banks at 2.5 per cent interest for lending to industry at 5 or 6 per cent.

The epigraph of Charter-2016 is a citation from President Putin on the need to “support competitive manufacturing”. Right now, the Ministry of Finance is pushing to reduce budget subsidies for various industries, even though Medvedev last month publicly acknowledged the success of a pilot program to subsidise agricultural implements production. The Charter proposes an array of “active incentives for economic growth”, to establish “the priority of high-tech industrial and manufacturing companies over raw materials”. Many of them overlap proposals for internal creditgeneration which Glazyev has repeatedly put on the table in recent years.