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
(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].
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.