The Duran: Five Years of Sanctions, and Russia is still growing

The Duran’s Alex Christoforou and Editor-in-Chief Alexander Mercouris discuss the state of the Russian economy under Vladimir Putin, five years after the first sanctions were imposed on Russia for the accession of Crimea to the Russian Federation. Its monetary policy is discussed and contrasted with the negative rates in Western countries.

My comment: The Russian Central Bank is not immune from the same fallacious economic thinking we see in the West. Conventional wisdom says that high interest rates combat inflation, while low interest rates fuel it. Obviously, this mantra falls short when you apply it to our current reality. One country leader who gets it is Turkey’s president, who, like Trump, is pressing his own Central Bank head to relax borrowing costs. Higher interest rates are good for people who save in Treasury bonds, but what percentage of the population holds assets in the form of Russian Treasuries? Pension funds do require Government debt instruments in order to protect themselves against inflation; and Government debt is far safer than [private] commercial paper. Being cut off from foreign capital markets, there’s no reason to keep interest rates high, even with a banking sector left largely unregulated on the asset side.

As for the West, the fact investors are buying bonds which have negative yields means that the outlook on inflation is dismal and they still see this Government-issued instrument of saving as worthwhile. True, negative interest rates are a tax on the reserve accounts banks hold at the central bank. It’s a tax on bank liquidity. But there is no liquidity crisis in countries like Germany, the UK, and the US, and indeed there can’t be such a crisis, as long as their banking sectors meet their capital requirements. When bank assets shrink in value relative to bank liabilities, which are stable in value, this erodes their equity and makes it harder for them to borrow and can even lead to bankruptcy – unless the institutions in question are well-connected to the ruling class, in which case, the Central Bank and Treasury intervene with all sorts of bailout schemes. One reason as to why the Fed, the BoE, and the ECB adopted QE and near zero interest rate policy was in the logic that flooding the banks with reserves will revive lending. This move only makes sense in the fantasy world of mainstream economic thought – which preaches the fiction that banks lend out reserves to customers when they make loans. In reality, however, that doesn’t happen. Loans create deposits, while reserves are shuffled back and forth [as necessary] for legal accounting and settlement purposes only.

In July I wrote a piece on Russia’s macro picture, and pointed out why its budget surplus doesn’t put drag on the domestic private sector, due to the foreign sector’s large deficit against Russia [7 percent of Russia’s GDP in 2018]. With a budget surplus of 2.7 percent of GDP last year, that left Russia’s domestic private sector in a net financial surplus of 4.3 percent of GDP. The same situation is projected for this year.

On the question of affordable Government investment in public infrastructure and public services… it’s not about accruing financial savings before the Government can invest. After all, we’re talking about balance sheet statements [the Sovereign keeping a ledger in his own unit of account], not savings in actual physical materials. Russia has the technology, the skilled labor, and necessary materials to expand public services and physical infrastructure; and it doesn’t require foreign currency for any of this. For a country like Russia, a country with monetary sovereignty, there is never a “lack of its own money.” The challenge, or art of public finance, however, is to conduct fiscal policy in such a manner to accommodate investment, job creation, and income growth while keeping prices in check. So long as wages and profits are rising faster than prices, you achieve real growth, and that’s what matters.

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Fusion Energy, Top Priority for Russia

Separating himself from that cynical [Neo-Malthusian] worldview, Putin stated “it is impossible and pointless to try to stop human progress. The question is; which base can this progress realistically be built upon to achieve the millennium development goals set by the United Nations?” Answering his own question, Putin laid out the important role of fusion power as the foundation for a harmonization between the realm of nature (the biosphere) and the realm of creative reason (the technosphere): “super-efficient scientific, engineering and manufacturing solutions will help us establish a balance between the biosphere and the technosphere… fusion energy which in fact is similar to how heat and light are produced in our star, the sun, is an example of such nature-like technologies.”

Read the full piece by Matthew Ehret here.

A minor, but important correction to Mr. Ehret’s article. The Technosphere is that part of the environment made or modified by humans. The “realm of creative reason” is called the Noosphere [the realm of human thought]. Thought-objects are wholly distinct, but inseparable from the realm of matter. In the vision of Vladimir Vernadsky, one of the greatest scientists of the Soviet Union and indeed of the 20th century, humanity will be able to create its own resources via mastery over nuclear processes.

I must state my disagreement with the following paragraph. “The 1970s saw the west suffer a subtle coup d’état with the elimination of all nationalist leaders committed to defending their populations from the re-emergence of a financial oligarchy which had only recently failed to achieve world domination under Hitler and Mussolini.”

I am very familiar with the writings and narratives of Lyndon LaRouche and his organizations. Some things LaRouche got right, other things he didn’t. The Axis powers were not anti-science, were not anti-industry, nor were they Malthusians. Yes, the Nazis believed thoroughly in eugenics and applying eugenics to humans. But their goal was never to plummet the population to pre-industrial levels, as is the wet dream of contemporary eco-fascist-aristos. Also, Nazi German imperialism lacked the financialization ethos of other empires.

The same is true of Imperial Japan. Their type of imperialism was conquest and development, for them, not for anyone else. It’s a big [ahistorical] mistake to paint German National Socialist ideology and the Nazi regime itself as just another club of oligarchs, looking to extract interest and rents left and right, content with feudalism, like the rulers of the Roman Empire.

Russia’s Macro Picture

by Serban V.C. Enache

I used data available from the Russian Federation’s official statistics via the tradingeconomics website to figure out the country’s sectoral balances in the past nine years. First, let’s clarify what the three sectors are.

Government sector = [Government net fiscal position]

(G-T) = Government spending minus Government taxation

Foreign sector = [Russia’s net exports with inverse sign]

-(X-M) = Exports minus Imports

Domestic private sector = [net position of firms + households]

(I-S) = Investment minus Saving

(I-S)+(G-T)+(X-M)=0

(G-T)= -(I-S) -(X-M)

We can see that the private sector has steadily built equity at a handsome pace. The primary fuel for private sector net savings has been the foreign sector’s back to back high deficits against Russia alongside the Russian Government’s net fiscal deficits. Unfortunately, I don’t have the disaggregated data for the private sector, which would show how those net savings are distributed among financial and non-financial firms and households. If I were in Putin’s shoes, however, I wouldn’t celebrate the Government’s surplus from last year. In fact, I’d strive to put it into deficit again via extra investments in physical and social infrastructure and R&D. I’ll explain why in a bit, but let’s have a look at some of the other indicators…

Private debt is going up, which is unsurprising. Calculated in US dollars, loans to the private sector are at about 445 billion. Unfortunately, we don’t know how many of those loans are for productive purposes [for firms to increase output] and how many are for speculative purposes [designed to inflate asset prices].

Inflation has gone down considerably in recent years. The little bump toward the end of 2018 is nothing to be concerned about. It’s a consequence of labor force participation going up, as we shall see in the next graph.

The labor force participation rate has spiked from below 62 percent to nearly 68 percent. Obviously, there’s still room for employment levels to go up. And the Government should strive to offer jobs for anyone willing and able to work, in order to combat all the socio-economic and psychological ills associated with involuntary unemployment, particularly long-term involuntary unemployment.

Standard economic thinking is to claim that anything below 5 percent unemployment is akin to full employment. Those individuals who happen to be part of that 5 percent unemployed figure don’t count in the eyes of mainstream economists and policy makers. Russian fiscal policy shouldn’t fear unemployment going below the [arbitrary] mainstream threshold.

As we can see from this graph, the economy is still operating with excess idle capacity. That means there’s still room to increase demand in order to employ capacity that is currently unused.

In response to the commercial and financial sanctions imposed by the West, the Russian Central Bank tried to juggle with the key interest rate. Completely unnecessary. This rate represents the cost of liquidity. Banks who are below their reserve minimum have to borrow reserves [numbers in checking accounts at the Central Bank] from banks who have a surplus, or from the Central Bank itself. Personally, I favor permanent zero interest rate policy [ZIRP] and no reserve minimum requirement for banks. Permanent zero interest rate because it minimizes cost pressures on output and investment, thus helping to stabilize prices. And by eliminating Government interest payments to the non-government sector, labor force participation and output are increased. ZIRP indeed hurts savers more than it aids borrowers, so a reduction in fiscal drag would be appropriate to counteract this particular consequence of ZIRP. No reserve minimum requirement because banks do not lend out reserves to their customers when they make loans and they are not constrained by reserves in their ability to issue loans – they are constrained by their capital [the spread between assets and liabilities] and by the actual demand for loans.

Banks use reserves for accounting and settlement purposes, and they use reserves to purchase cash to feed ATMs, in order to satisfy the public’s desire to hold physical liquidity. For a list of asset side regulations for the banking sector, regulations required to combat wealth extraction and systemic risk, see this article.

This graph represents the interbank rate, the price at which banks borrow reserves from each other. The CB rate and the interbank rate are often very similar in terms of figures. Standard practice among most Central Banks across the world is to minimize direct transactions between banks and the Central Bank, that’s why the latter is called ‘lender of last resort’. In truth, however, the interbank market serves absolutely no public purpose and ought to be abolished. Banks in need of reserves should borrow directly from the Central Bank.

Russian Government debt as percentage of GDP is extremely low compared to the norm among most developed countries. Japan, for instance, has a ratio of almost 260 percent and that country’s doing just fine [full employment & no inflation]. Unlike the Euro Zone states, a Government that spends and taxes in its own free floating fiat currency has maximum space to pursue whatever fiscal and monetary policy it desires. With debts denominated in its own currency, the Government can operate with negative financial capital indefinitely without any risk of bankruptcy.

The Russian Central Bank can boast about foreign currency reserves of around half a trillion US dollars in value. Yet, not all of that half a trillion represents foreign fiat. Russia’s gold stocks have hit a 5-year high, accounting for about 19% of its foreign reserves. At the same time, its share of US dollars was cut from 43.7 percent to around 20 percent. Remember that US dollar reserves sit on the Federal Reserve’s ledger, and Euro reserves sit on the ECB’s ledger. If Washington and the EU decide to freeze these accounts, Russia can’t use the funds. Any and all sovereign nations should pursue alternative payment systems to the established hegemonic order [like currency swaps with partner states].

Conclusion

Russia’s macros look very promising. Whenever I watch Putin’s Q&A interviews on national affairs, however, a bunch of stupid proposals ensue about some tax cuts here, some more subsidies there – all of which contribute to bureaucratic overhead and the proceeds end up captured by landlords and money lenders. If Russia would drop its regressive tax code and switch to a [Georgist] quasi-Single Tax system [100 percent land-value tax + pigovian tax], the real economy would experience the highest rate of development on earth, even under sanctions.