Russia and Global Finance

Texte, en anglais, envoyé pour la XVIème Conférence Internationale en l’honneur de Dmitry Likachov (Saint-Pétersbourg, Université des Sciences Sociale)

The rise of global finance is putting national interests at test. The huge flow of capitals is both a bonanza for some but also a major factor of economic destabilization be it at short term or in the longer run, for some countries. Actually, this flow has a very small impact on direct investment. Only 5% of the total flow is linked to real investment and financial globalization of the 1980’s and 90’s had no impact on the investment process[1]. Still, international finance could constrain to a dangerous proportion the agenda of any government. The current situation of Russia is one case of such a situation.

Russia has been facing Western sanctions since 2014 in the wake of the Ukrainian crisis. Financial sanctions have hurt to a considerable extent the Russian economy either directly or indirectly through the fear obvious in many Western banks to be targeted by specific US government sanctions in their operations with Russian enterprises and banks. But, the impact of these financial sanctions is to be understood in the light of the Russian development model, which, between 2002 and 2012, relied largely on external finance (and non-resident loans) to finance its growth. This model has been found vulnerable to decisions made by the US government, hence raising the issue on Russian national interest. But, in a broader sense, the reliance of Russian enterprises on globalized finance to fund their development is to be questioned[2].


The post-1998 development model and its contradictions

Russian growth has been impressive since 1998. But it was linked to different factors. In the immediate years following the 1998 crisis, the GDP “rebound”- as it was called by then – was mostly linked to direct and indirect effects of the sharp ruble depreciation. Imported good became overnight much too expensive, opening a window of opportunity for local producers. This raised their profits and they had to largely increase the production level to face the demand. By doing so they induced first a huge movement of inventories rebuilding and then, from 2001 on, a similar movement for investments. The large increase in labour productivity enabled production costs to be kept relatively low. Destruction of a large part of speculative markets (i.e. markets for GKO) implied that savings could not be used on these markets and were mostly used for investment.

By 2002, when commodity prices began to increase a new mechanism began to set in. The large financial inflow coming from exports first began to beneficiate the population but also led to a creeping raise of the exchange rate (notably after early 2006). The increase of income level be it linked to a direct mechanism (the economy rebuilding) or to indirect ones (the real exchange rate appreciation), boosted internal demand. A significant number of foreign enterprises came then to Russia, not just through imports but also notably by developing their owns production capacities, boosting economic efficiency. This became obvious with high prices for hydrocarbons. Economic growth became strongly linked to consumption and the huge consumption lag accumulated since the late 1980’s gave birth to consumption frenzy. One can already see how global finance exerted its influence over Russia. The complete opening-up of the foreign exchange market made the ruble quite vulnerable to inflows or outflows generated by speculative anticipations[3]. If this move was seen as a necessity to attract more foreign funding to the Russian economy it also put the Central Bank into a hot spot and added water to it. The Central Bank of the Russian Federation began engaged in a fight to stabilize the ruble either against too strong appreciation (when oil prices went up) or against equally too strong depreciation (when oil prices went down).

In retrospect these years gave birth to a very specific development model where Russia was not just specializing into commodities export but became dependant too of the Western financial banking system to fund its development. This was one of the biggest challenges for Russian sovereignty. Capital exports, fuelled by the huge trade surplus, were used as a kind of guaranty for Western loans. Reasons behind this trend were complex. Certainly, the fact that interest rates were lower on international finance markets that in Russia, a fact made more obvious by the Real Exchange Rate appreciation, played an important role in these developments.


Figure 1

Source: Central Bank of the Russian Federation

A - 01 dettes en devises - copie

The Central Bank policy, with its preference for high interest rates and an out dated strategy whose roots are going deep into the monetarist paradigm[4] was a strong incentive for enterprises and banks alike to move to Western banks and financial markets to find funding. But the state of the Russian banking industry too, was a distinct factor for this preference for borrowing money abroad to finance industrial development. But they were not the only factor. Uneasiness of Russian industry owners or stakeholders with the current Russian government, uncertainty in the Russian institutional system, corruption, all these were important factors too in this preference for using foreign financial mechanism. This could explain why Russian banks and large enterprises have become so dependent in foreign money even if to a large extent internal financing capabilities existed and could have been used to fund economic development. But, in doing so they created à distinct vulnerability of Russian economy to extern financial perturbations[5], be they induced by a large world economic crisis or by political motivations. As a matter of fact financial globalization was creating all-over the world a nexus of vulnerabilities[6], some of which could be triggered by any minor accident.


How to change a development model?

This development model was actually undermined by the world financial crisis of 2008-2010. But this model actually collapsed when the United-States and the European Union implemented the so-called “Sanctions” regime. It is to be understood that material sanctions have been mostly counter-productive[7]. But the picture is quite different when it came about financial sanctions.

This has been compounded with the huge drop in oil prices weakening the rubles. We know that if the share of hydrocarbons in the GDP is quite low, their relevance for internal finance is important. Actually, hydrocarbons (oil and gaz) are not playing major a role in the global production, with a cumulated share of only between 10% and 12% GDP. But they are playing major a role for the budget as they represent nearly 37% of all budget revenues. Such kind of disequilibrium between the production share and the financial share of hydrocarbons is a good picture not just of what has been called the plague of commodities but of long-term effect of a strategy itself induced by too high a reliance on international finance. To some extent, and this had been aggravated by the complete opening-up of the foreign exchange market in 2006, Russia have relied on energy prices to boost its finances and help foreign borrowing. The impact of oil prices has then been obvious on Russia’s economy. But the precise nature of links is frequently not understood


Table 1

Budget share (in %) of oil and gaz exports

  For the consolidated budget
2010 2011 2012 2013 2014
Oil and refined products 28.5 31.9 32.7 32.2 33.2
Gaz 2.3 3.2 3.7 4.3 4.1
Others 69.2 64.9 63.6 63.5 62.7

Source: FCS, Federal Treasury of Russia

One possible relation is a fiscal one. It could lead to a simple relation between oil (and gaz) prices and the rate of exchange. As taxes are paid in rubles, to cover expenditures so made in rubles, one obvious solution would be to let the ruble depreciates when prices are falling down, or to appreciate when they are coming up. But this view of the relations between hydrocarbons and the economy is simplistic to the extreme.

First, as part of Russian consumption is imported a depreciation (or appreciation) of the ruble has a direct impact on the consumption. Of course, high incomes households are proportionally consuming a higher proportion of imported good than incomes with lower incomes. This is why, to some extent, the appreciation or depreciation of the currency is much more felt by high incomes groups of the population. But, these groups are also ones who consume much. So any depreciation of the ruble following a drop in oil prices will generate a drop in global consumption and hit the non-hydrocarbon producing industry. This crunch in the global consumption is usually going with a bout of inflation. Not only prices of imported goods are going up with ruble depreciation but even locally produced goods are seeing their prices increasing as producers are taking the opportunity to increase their margins. So, even if prices of locally produced goods are increasing less than those of imported goods, they will come up too and this will reduce internal consumption. But, this is only one side of the coin.

Oil prices are used as a benchmark in the finance sector to judge the solvency and liquidity of Russian actors. The second indirect link between oil prices and economy is then actually financial. When prices drop the ruble depreciates. When the ruble depreciates economic agents with foreign denominated currencies credits are having a tough time to pay principals and interest. As a direct result of this situation, a strong drop in oil prices is to put indebted agents in a hot spot. But, this is not the only problem. Because of financial sanctions Russian enterprises and banks have been cut short form their traditional sources of funding. They could not refund outstanding debts. The amount of debt repayments is growing as a result. The exit flow of foreign currencies for these repayments is also having a negative effect on the exchange rate.

Financial sanctions, cutting Russian banks and large enterprises from western financial markets, or at least severely constraining their ability to borrow money created serious difficulties. Russian debt to non-resident agents declined swiftly and the amount of repayment increased to heavily.


Table 2

Payment Schedule of External Debt of the Russian Federation (millions USD)









Q3 2016 Q4 2016 Q1 2017 Q2 2017 Total
General Government 686 200 397 212 495 596 201 1 686 4 473
Central bank 0 0 0 0 0 0 0 0 0
Banks 8 766 7 400 4 951 7 241 2 963 4 116 5 960 7 102 48 499
Other sectors 27 299 25 012 10 992 17 876 8 939 17 806 11 434 12 182 131 540
Total 36 752 32 610 16 340 25 328 12 397 22 518 17 595 20 970 184 512

Source: Central Bank of the Russian Federation


One important thing here is the fact that the main burden of these repayments has and is to be shouldered till the second quarter of 2017 by enterprises. Enterprises repayments are making 71% of the total repayment. This is indicating how much Russian enterprises, and mostly large enterprises, have used external funding for their developments.


The shaping of economic reactions by globalized finance

The result of these different factors is well known. The ruble has taken quite a beating since late summer 2014. But, this has not been the direct driver for the recession Russia is experiencing. The real driver was the reaction of the Central Bank. And here we could argue well that the Central Bank policy was self-destructing. A large part of the current recession has been created by Central Bank actions and definitely not by Western sanctions or oil prices fall. We are then to precisely figure the Central Bank reaction to the inflationary bout induced by the fall of the rouble we discussed above. The Central Bank of Russia is committed to an “inflation targeting” policy[8]. Wise or unwise[9], and we don’t think it is wise as much is to be said about the so-called “inflation targeting” policy[10], it’s a fact. The CBR will then increase its interest rates every time inflationary pressures are seen coming. But the story doesn’t end here. If the ruble depreciation is taking a fast dive, the Central Bank will increase much its rates to “crush” speculation, as it has be seen in December 2014 when the CBR raised its primary rates to 17%. Here again it was a blatant mistake, but here again it’s a fact. High interest rates have never prevented speculation on any currency in the world[11]. It was too true for the ruble.


Picture 2

A - 012 GR2

Source: Central Bank of the Russian Federation


But the dramatic increase of interest rates had a very negative impact on the economy. To sum up a drop in oil prices is creating a very adverse financial environment for households and enterprises alike. Household are reducing (or more precisely containing) their debts linked to consumption and enterprises are reducing investments. This parallel reduction in investment and consumption had and still is having a very negative influence on economic activity.

All this is well known to specialists. But how could we estimate the link between oil prices (usually in the BRENT index) and the exchange rate of the Ruble? The exchange market correlation with oil prices is an important point for all forecasts. Previously, the market was falling at RUB1/$ per $1/bbl decline in oil prices, with RUB85/$ corresponding to $30/bbl. But it is true that rumours could spread leading to a panic move on and already illiquid market. By the way financial sanctions have certainly destabilized the ruble exchange rate as it could be seen in December 2014 of during the first quarter 2015. However, some precise researches have been done on the precise link. They are shoving that there is no linear relation and that the robustness of such a relation has been decreasing since 2012-2013. To some extent the exchange rate was much more related to oil prices by then than what it has been the last two years (2014-2015).


What the alternative is?

It’s obvious than introducing some forms of capital controls could have done a better job. It is to be known that even the IMF now recommends capital controls in some specific situations[12] as it is now well acknowledged that strong exchange rates fluctuations could be extremely disruptive for the economy[13]. Some Russian authors have advocated such a move[14], and the debate is still going on[15].

The introduction of such a system could allow Russia to develop a strong industrial sector to provide both the internal market and the export market too without interference from the globalized finance. This was the strategy adopted by a number of East-Asian countries[16], but also by France between 1945 and 1975[17]. Such a development doesn’t imply to stop developing the commodity sector. Actually, the oil and gaz sector could become major consumer of Russian manufactured goods and help to develop a high-tech sector. The main issue here is more how to ensure the development of manufactured goods without compromising the production of commodities. It is not just a problem of developing new productions but also one of changing the whole structure of Russian industry as a significant number of new enterprises are to be created to develop these new productions, and their development is challenging an industry used to rely on large integrated groups. It is true to say that the Russian government has put a priority on the development of a modern manufacturing sector for years. But, when the Ukrainian crisis began to shape international relations Russia has not broken with its traditional model. To some extent the crisis in international relations has the direct effect to make the change of model both an absolute necessity. But, in the same time, this crisis was making it a very hard undertaking. So far Russia is still caught in the middle of a kind of new “transition”, but time is running short.

Some progresses have nevertheless been made. This is in part linked to the huge Ruble exchange rate depreciation that is boosting competitiveness of manufactured goods and to other part to the boom of weapons exports. But whatever factors behind it proves that Russia has a strong export potential for manufactured goods[18]. The share of internally produced consumption goods is also increasing fast on the internal market. But, the issue of defining a new integrated development model is still pending and this could be seen on to the fact that investment is still depressed and still mostly funded through borrowing on foreign financial markets. This is why some form of financial protectionism or isolationism could well be necessary if Russia wants to foster its national interest in face of the current challenge of globalized finance.




[1] Rodrik D., and Arvind Subramanian, (2009), ‘Why Did Financial Globalization Disappoint?’ in IMF Staff Papers, Volume 56, Number 1, pp. 112-138

[2] Durand, C., (2007), « Pourquoi les firmes métallurgiques russes s’internationalisent-elles ? Une perspective institutionnelle et systémique », in Revue d’études comparatives est-ouest, vol. 38, n°1, mars, pp. 151-194

[3] Kaminsky G.L., C.M. Reinhart et C.A. Végh, (2004), “When it Rains, It Pours: Procyclical Capital Flows and Macroeconomic Policies”, Paper prepared for the NBER 19th Conference on Macroeconomics, August 13th, 2004, IMF, Washington DC

[4] Galbraith J.K. (2008), « The collapse of monetarism and the irrelevance of the new monetary consensus », Levy Economics Institute of Bard College, Policy note, downloadable at

[5] Sapir J. (2008), « Global Finance in Crisis » in Real-World Economic Review, n°46, May.

[6] Gallegati, Mauro, Bruce Greenwald, Matteo G. Richiardi, and Joseph E. Stiglitz, (2008), ‘The Asymmetric Effect of Diffusion Processes: Risk Sharing and Contagion’, in Global Economy Journal, 8, 3, 2008, available at

[7] Asford E., « Not-so-Smart sanctions », in Foreign Affairs, January-February 2016,

[8] Bernanke B.S., et F.S. Mishkin (1997), ‘Inflation Targeting: A New framework for Monetary Policy’ in Journal of Economic Perspectives, vol. 11, n°1/1997, pp. 97-116. See also Bernanke, B.S., T. Laubach, F.S. Mishkin et A.S. Posen, (1999), Inflation Targeting: Lessons from International experience, Princetoon University Press, Princeton, N.J

[9] Glaziev S., (С. Глазьев) 2015, ‘О таргетировании инфляции’ in Voprosy Ekonomiki, N°9/2015, pp. 1-12

[10] Arestis P., et M. Sawyer (2008), “A Critical Reconsideration of the Foundation of Monetary Policy in the New Consensus Macroeconomics Framework”, Cambridge Journal of Economics, Vol. 32, n° 5, pp. 761-779.

[11] Kim S., et S.-H. Kim (2007), ‘Financial Panic and Exchange Rate Overshooting During Currency Crises’, International Economic Journal, mars 2007, Vol. 21, n°5, pp. 71-90.

[12] Ostry J. et al., (2010), « Capital Inflows: The Role of Controls », IMF Staff Position Note, Washington (D. C.), FMI

[13] Hutchison M. N. et I. Noy (2002), “Sudden Stops and the Mexican Wave: Currency Crises, Capital Flow reversals and Output Loss in Emerging markets”, Economic Policy Research Unit, Institute of Economics, University of Copenhagen, 2002.

[14] Glaziev S. (2015), ‘Эксперименты ценою в суверенитет’ [Les expériences du coût de la souveraineté] in Ekspert n°28 (951).

[15] Shibanov A., (2015), ‘Сергей Глазьев и политика ЦБ РФ’ [Sergey Glaziev et la politique de la BCR] in TrV-Nauka, № 190, pp. 6–7

[16] A. Amsden (1989), Asia’s Next Giant, New York, Oxford University Press; Wade, R. (1992), Governing the Market, Princeton University Press.

[17] Monnet E., (2013), Financing a Planned Economy: Institutions and Credit Allocation in the French Golden Age of Growth (1954-1974), BEHL WORKING PAPER SERIES, WP-2013-02, Berkeley CA. Idem, (2014), “Monetary policy without interest rates. Evidence from France’s Golden Age (1948-1973) using a narrative approach”, in American Economic Journal: Macroeconomics , Octobre, Vol. 6, n°(4), pp. 137–169

[18] Hansl B., « With the ruble depreciation, ‘Made in Russia’ could once more become a worldwide trademark” in Brookings Institution, November 3rd, 2015,


Jacques Sapir

Ses travaux de chercheur se sont orientés dans trois dimensions, l’étude de l’économie russe et de la transition, l’analyse des crises financières et des recherches théoriques sur les institutions économiques et les interactions entre les comportements individuels. Il a poursuivi ses recherches à partir de 2000 sur les interactions entre les régimes de change, la structuration des systèmes financiers et les instabilités macroéconomiques. Depuis 2007 il s'est impliqué dans l’analyse de la crise financière actuelle, et en particulier dans la crise de la zone Euro.

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