Putin on the brink?

Interview done with Oleg Shenderyuk, a journalist working for Izvestija


–       Do you think President Putin is really wanting to Liberalize the Russian economy?

I think that’s misleading to consider the issue of more or less liberalism only from the point of view of what the President thinks. It is perfectly clear he don’t want to return back to the Soviet-type economy. But, it is also perfectly clear he is no liberal. Fundamentally, he is a pragmatic. What he wants is a strong economy because this translates into a strong country. From this point of view his opinion is not very different from what was developing in Meiji Japan. He has perfectly understood that the strength of the Russian economy can’t just be its 8 o 10 very large enterprises. Russia needs the development of a complete stuff of small and medium-sized enterprises with a huge innovation potential. The main issue now is to understand how could Russia move to this direction. We have in Russia a deeply entrenched culture of monopoly. It’s not just a culture in administrative circles, it’s too a culture highly developed in large enterprises. Then a liberalizing policy could be a double-edged sword. It could give more freedom toward the administration but it could also lead to more freedom for large enterprises to enforce their monopolistic situation to the detriment of small and medium enterprises. The most important thing here is to give small enterprises the financial means they need to develop without becoming dependant to large enterprises. And this could not be done without some kind of State intervention.

–       Is this economic liberalization possible when the West is waging an economic war against Russia?

Sanctions were having an impact, but it is not to be overestimated. Where sanctions are the most effective is in reducing the availability of US dollars for Russia. As Russian large enterprises and banks have developed their borrowings in dollars, mostly because it was cheaper than the Russian internal market this is creating a general shortage of USD and this is explaining largely the recent plunge of the Ruble. However the market on which Russian enterprises have the greatest potential now is the internal market. The process of import substitution the depreciated ruble allows could generates a huge market for the development of enterprises. From this point of view, very paradoxically, the current situation is largely favourable to the development of a “free” sector. This however implies that private enterprises could invest. Of course, they could invest their own profits. But to rely only on profits to fund investment is to imply quite a high level of inflation. Investment is done in rubles at one time and enterprise turnover is done at another time. Inflation from the investment point to the sell out one is to increase mathematically the return over investment. But one couldn’t rely only to this mechanism. This raises the issue of credit borrowing and then the problem is the Central Bank policy. Its interest rates are largely determined by the rate of inflation and the willingness to cut short speculation on the exchange market. This is leading to interest rates that are largely unfavourable to the development of a small and medium-sized enterprises sector. The Central Bank appears then to be the main stumbling block on the path of development of economic liberalization in Russia.

–       How optimal is the Russian Central Bank Policy?

The CBR policy has been challenged on different points. Let me here clearly delineate between the short-term policy and the long-term one. In the short run the CBR acted quite wisely till last week by letting the ruble depreciates as the barrel price was stumbling down. It would have been a pretty ill-advised policy to try to stabilize the ruble before oil prices would have stabilized because of the impact of oil prices on the Russian budget. By letting the ruble to depreciate the government is helping to balance the budget with a much lower oil price than expected at first. By the way, with a barrel prices at less than 60 USD a huge part of the US shale industry but also the oil-sand industry in Canada doesn’t make profit. These industries have borrowed hundreds of billions of USD and could strain the US banking industries. It is now becoming a more serious situation with a sharp decrease in exploration permits. We could then forecast that oil prices are to move up by next year, sometime between February or March and reach at least 70 USD for a barreL

However oil prices were not the only factor playing in the game. We had also the weight of debt reimbursement (debt redemption) and speculation. We know that credit borrowing had been pretty important these last two years and that some enterprises have to reimburse huge amounts of money. We also know that these reimbursements are to dramatically tapper in 2015, reducing then the need for enterprises to ask for more US dollars.


Reimbursement to be made on foreign lenders in US Dollars

(Billions of USD)

Q3-2014 Q4-2014 Q1-2015 Q2-2015  Q3 2015  Q4 2015  Q1 2016  Q2 2016



























Source: Central Bank of the Russian Federation

All this would have to lead to a stabilization of the Rubble exchange rate. This is not what has happened. It is obvious now that pure speculation is playing a large role on the exchange markets. Some people are borrowing rubles and then exchanging them for US dollars expecting the exchange rate to depreciate further and then to sell their USD for a profit. The CEB hiked its interest rates to fight the speculation. But history shows that in such a situation interest rates would have to be tremendously raised to be an effective weapon against speculation. This is not possible. Actually, when facing a strong speculation the only effective weapon is capital controls. This is what even the IMF is now saying[1]. A huge range of economists now advocates capital controls.

If the Russian government and Central Bank authorities have the positive proof that movement of the Ruble are the result of a speculation they would have to introduce capital controls. The sooner would be the better. They would have also to make clear the fact these controls are to be temporary.

Now turning to the long-term policy it is known that the CBR adopted the principle of “inflation-targeting”, but let the inflation target pretty vague. I don’t thing it’s a good policy for Russia. Of course one have to keep an eye on inflation. But the inflation-targeting policy relies on unsound theoretical bases and lead to interest rates much higher than what is necessary given the actual situation of the economy. The only good thing with this policy was that it let the Central Bank without any exchange-rate target so the ruble was left free to depreciate. As the Ruble was overvalued by the end of 2013 the turn toward inflation-targeting, even if unsound had some positive consequences.

–       Is economic growth possible keeping interest rates high and not increasing money supply? CB is under harsh critique in Russia now

Quite clearly with so high interest rates now (17%) the economy is quite effectively strangulated. What sanction have been unable to do, what even the drop of oil prices have been unable to do, to push the Russian economy into a depression, the Central Bank policy could well do the job. It is highly paradoxical. Russia is to self-inflict what could be a disastrous shock to its economy. By talking with different investment bankers in Russia it is clear that interest rates a 17% (that is over 7% over the inflation rate) are to stop all projects. Now, if this hike is for just some days and if we would see interest rates going down by early January then consequences would be very mild. But, if this hike is to stay for quite long, results could be very disruptive for Russia development.

[1] Jonathan D. Ostry, Atish R. Ghosh, Karl Habermeier, Marcos Chamon, Mahvash S. Qureshi, and Dennis B.S. Reinhardt, Capital Inflows: The Role of Controls, I M F STAFF POSITION NOTE, February 19, 2010, SPN/10/04, Washington DC.

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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