Time For a Gold Rouble?
It's not just America, the entire global financial system is doing very badly because the world's financial system is integrated with that of America's, the world's largest economy. I find it funny, however, that the western media has for some reason begun to highlight the poor performance of the Russian economy today. In the not too distant past, there had been dead silence in America when it came to news regarding Russia. Ever since the financial collapse in the West, however, and specially since Russia's victorious war against western backed Georgia last summer, there has been regular coverage of Russia's economic woes. What's going on, why are they all of a sudden interested about Russia's economy? The problem in Russia is their - stock market, the play ground of their oligarchy. Other sectors of the Russian economy have actually been performing quite well under the circumstances. More importantly, unlike America's tens of trillions of dollars of debt and deteriorating dollar, the Russian Federation today is virtually debt free and the ruble is well managed. Russia's economic problems today seem superficial and temporary, America's economic problems are profound and long term.
There used to be a habit of framing old Tsarist bonds and putting them on the wall. Lenin's decision to renege on the Russian imperial debt meant that it became mere paper, interesting only as a historical relic. In the light of the recent financial crisis in the USA, could the same thing happen now to the bonds issued by the American government, and could the country which has dominated the world for the last half century now enter history as a bankrupt state? And what can Russia do in the circumstances?
The decision by the US government to inject $700 billion into the financial system means that the already gigantic annual budget deficit of the American state (previously some $450 billion a year) will now rise by a factor of three. The total state debt of the USA will rise to well over $11 trillion. It is obvious that such a colossal debt can never be repaid. Instead, it will be serviced by more debt in the future. The contrast with Russia, which has painstakingly sanitised its state finances to the point that it now has more money to lend than the IMF, could hardly be greater. The recent financial crisis itself grew out of this American culture of debt. To some extent, all countries share it: since 1914, all countries use paper currencies, i.e. debt instruments which are never redeemed. Whereas before the First World War, bank notes were essentially vouchers for specific amounts of gold cash, now the "promise to pay the bearer" (which remains inscribed on British bank notes) is in fact hollow.
In America, this basic culture of debt is aggravated by the fact that other countries use the dollar itself as a reserve. This means that the United States can export dollars in order to pay for its imports without the dollar losing value. Other states also need dollars to buy key commodities like oil. The USA can therefore export paper currency almost indefinitely - the famous "deficit without tears" analysed by the great French economist, Jacques Rueff. Naturally, if the state itself encourages such a culture of debt by issuing unredeemable paper currency to pay for imports, and by accumulating such mountains of debt, then it is no surprise if the American financial markets themselves operate on the same basis. But the collapse of those markets is only a symptom of a much deeper problem, the basic insolvency of the American state itself.
What can Russia do about this? At first sight, Russia's role in the international financial system does not seem very large. However, as a major exporter of hydrocarbons, her role in the world economy is actually very important. As the age of the dollar draws to a close, Russia will have to consider selling her oil and gas not in the devalued American currency, but instead in the euro used by most of her customers. It is surely unnatural for two geographical neighbours to do such large volumes of business using the currency of a distant and now ailing nation. Second, the Russian leaders might also consider making their own currency, the rouble, convertible into gold. The idea of gold convertible currencies is extremely unpopular among most economists: they dismiss gold as a "barbarous relic" (to use the famous phrase of John Maynard Keynes) and suggest either the present regime of paper currencies or, at best, a link to a basket of commodities.
Both these solutions are highly artificial and based on the same level of state control which has now just so spectacularly failed. Indeed, which is more "barbarous" - the reintroduction of gold as an instrument of payment, or the practice of amassing huge quantities of the precious metal to keep it locked underground in the vaults of central banks? The contempt of the Keynesians notwithstanding, it is an indisputable fact that gold does remain the ultimate store of value, which is precisely why states own so much of it. Russia has less to fear than other countries from the introduction of a currency convertible into gold. Governments are typically hostile to gold because it reduces their discretionary power over the currency and the economy: they say that the money supply cannot be made dependent on the production of gold mines. In reality, this argument is bogus because the amount of mined gold already in existence vastly exceeds the yearly production, so mining does not in fact have an appreciable impact on supply. But, as it happens, Russia is a major producer of gold anyway and therefore to some extent controls production.
Secondly, Russia is vulnerable to her status as an exporter of primary materials - and as an exporter generally - especially in the age of inflation which is about to dawn. The more the Russian economy exports, the more her national paper currency will rise, making those exports more expensive. This is bad for an export-oriented economy. By contrast, the value of a gold rouble would depend not on the trade balance of the Russian economy at all, but instead simply on the price of gold itself which generally remains stable with relation to other commodities. Russia has shown surprising success in putting an end to the unipolar world of which American strategists have dreamed now for over a decade. There are no permanent victories in diplomacy, however, but a shift in the structure of the world financial system would help to entrench recent gains.
Putin: US image damaged forever over economy woes
The financial crisis has irreparably damaged the image of the U.S. as the leader of the free world and the global economy, Russian Prime Minister Vladimir Putin said Thursday. Putin's remarks during a Communist Party meeting were the latest Russian attack singling out the U.S. as the chief culprit in the global financial turmoil. "Trust in the United States as the leader of the free world and the free economy, and confidence in Wall Street as the center of that trust, has been damaged, I believe, forever," Putin said. "There will be no return to the previous situation." Putin and President Dmitry Medvedev have repeatedly accused the U.S. of responsibility for the crisis and called for changes in the world financial system. Finance ministers of the G-7 — the United States, Canada, Britain, France, Germany, Italy and Japan — meet beginning Friday in Washington. When Russia joins the group for political discussions, it becomes the G-8.
Russian Economy Has Very Strong Foundation - Pwc
PricewaterhouseCoopers (PwC) believes the current situation in the Russian economy differs from what is taking place in the West, Peter Gerendasi, PwC general director and managing partner in Russia, told journalists in Kazan on Thursday. PwC feels the economic foundation in Russia is very strong and the only problem that needs to be resolved quickly is an increase in liquidity in the banking system, he said. The current share prices on the Russian market are very low - speculatively low - and do not reflect the actual value of the companies, he said. Gerendasi said PwC supports the steps the Russian government is taking to bolster liquidity and hopes they will produce a positive effect. All the actions and changes the government plans to make need to be done quickly to receive the most positive effect possible, he said. It is difficult to predict how the situation will unfold further, he said. Gerendasi said he thinks the turbulence will continue on the market for a while longer, but said he is hoping to see some positive changes within a year. Gerendasi and Tatarstan Prime Minister Rustam Minnikhanov signed an agreement on cooperation between PwC and the republic in Kazan on Thursday.
Budget Surplus Tops 2 Trillion Rubles
The surplus in the Russian federal budget from January to September exceeded 2.5 trillion rubles (8.1 percent of the GDP), RIA Novosti reports, citing Finance Ministry data. A year ago at the same time, the surplus was slightly over 1.6 trillion rubles. Income to the Russian budget was 7.2 trillion rubles in that period this year, which is almost 80 percent of the plan for the entire year. Expenditure reached 4.6 trillion rubles, or 61.1 percent of plan. The consolidated budget, that is the combined federal and regional budgets, topped 2.5 trillion rubles in surplus at the beginning of September. It was also notable that the biggest expense in the first half of the year was defense. Russia receives is main income from the Federal Tax Service, which put 3.2 trillion rubles in state coffers, and the Federal Customs Service, which contributed 3.5 trillion rubles.
Russian firms to get up to $50 bln to refinance foreign debt
Russia's government is to allocate up to $50 billion for companies to refinance their foreign debt, Prime Minister Vladimir Putin said on Friday. "Up to $50 billion is being earmarked to refinance borrowings made by Russian companies abroad," Putin told a cabinet meeting. He said the state-run VEB bank would broker the transactions. Putin also said the government had decided to place up to 175 billion rubles ($6.7 billion) in Russian securities in 2008 and the same sum in 2009, with VEB being the operator. The Russian premier said the government was drafting a bill to provide subordinated loans of up to 950 billion rubles ($36 billion) to banks for 10 years. "These funds will be used to increase banks' capitalization and to solve liquidity problems," Putin said at a cabinet session. On October 7, President Dmitry Medvedev said at an economic conference that the government would issue banks a $36 billion subordinated loan for at least five years. Russia's financial system has been affected by a global credit crunch which started in the U.S. and quickly spread to Asia and Europe leading to record losses on Russia's financial markets, rising interest rates and a liquidity shortage.
Iceland turns to Russia for bailout
Russia has agreed to bail out Iceland by granting this small island state a huge stabilization loan at an unbelievably low interest rate. Is it an act of wanton generosity, or a far-sighted geopolitical step? And in general, four billion euros, is it a lot or a little? The fate of Iceland has until recently not concerned Russia one bit. Now only a lazy person is not discussing the incredible sum the "island of stability" is going to inject into the economy of a sinking island of geysers. Europe has meanwhile been discussing Iceland for a long time. Hedge-fund country, an example of liberal economic regulation and a model of a rapidly developing economy, Iceland was the first in the world to feel the impact of a full-bodied economic crisis. This happened at the end of 2007. Since this year began, Iceland's currency - the krona - has lost one-third of its value against the euro. Iceland's leading banks - Kaupthing, Glitnir and Landsbanki - have been marauded by international financial sharks. At the end of September, the country's authorities bought out (read, nationalized) Glitnir bank, and on October 7 Landsbanki, while on the same day Kaupthing bank received a 500 million euro loan from Iceland's National Bank. By the autumn of 2008 it had become clear Iceland might become the world's first country to suffer a default.
Why is the bubble of Iceland's economy bursting so loudly? It ballooned too rapidly, the IMF believes. In 2003-2007, the country's GDP had risen by 25%, with this robust growth fed mainly by outside borrowing. To attract foreign investments, the authorities strengthened the currency and ratcheted up interest rates (by the beginning of 2008, they were the highest in Europe - 15.5% per annum). The result was a monstrous misbalance: a modest GDP, on the one hand, and immense financial assets and tremendous liabilities, on the other. According to 2007 figures, Iceland's GDP was $16 billion, while its financial assets stood at 1,000% of GDP and an external debt of 550% of GDP. With Iceland teetering on the brink of default, Russia's stabilization loan of four billion euros is a lifebelt, and a very sizeable one (on the evening of October 7, Finance Minister Alexei Kudrin acknowledged Russia's readiness to pay, although previously he had denied such claims by Iceland's National Bank). Judge for yourself: when, in May 2008, Iceland was drowning, the central banks of three Scandinavian countries - Sweden, Denmark and Norway - set up a special $2.3 billion rescue fund for Iceland. Now Russia alone is ready to fork over two and a half times as much for the same purpose. In other words, four billion euros by Iceland's standards is substantial.
In Russian eyes, it is a vast sum, too. And one pledged at a very fair rate. To judge from a release issued by Iceland's National Bank, Russia promised it at LIBOR+(0.3-0.5)%. This compares with LIBOR+1% at which the Russian Central Bank wants to offer loans to Russia's Vnesheconombank. At a time when Russian authorities hold crisis emergency meetings almost daily, this looks strange, to say the least. The man in the street would say this is no time for liberal loans when one's own existence is at stake. This man's response would not be quite right, in my opinion. There are several reasons why Russia should agree to issue the loan to Iceland. The first and overwhelming one is geo-economic. Leaders in many countries are gradually beginning to understand that a world caught in the maelstrom of a financial crisis could be saved only by cooperative efforts. This was a theme running through a three-day world policy conference in Evian; it will certainly be taken up at an annual meeting of the International Monetary Fund and World Bank.
WB chief Robert Zoellick only recently proposed that the G8 also include BRIC countries (Brazil, Russia, India and China), Mexico, Saudi Arabia and South Africa. World leaders more and more often speak of the need to shelve personal ambitions, put away political squabbles and do something. To come to the aid of Iceland at such a time has been for Russia a decision prompted by stark necessity. Russia has a rich war chest of windfall oil money. By the end of September, its Central Bank had $566 billion in international reserves, and $32-plus billion in the National Welfare Fund and the Reserve Fund. Of course, Russia could sit it out on its "island of stability" and fight the crisis within its four walls. But in this case Russia risks suddenly discovering that the global financial storm whipped up even further by Iceland's hurricane has wiped out all its stockpiled reserves. Most of Iceland's lenders are European banks. Should Iceland declare a default, the whole of Europe would go into a spin, and would drag Russia after it, which now has a chance to scrape its way out of the crisis the cheap way. It emerges that by saving Iceland, Russia is saving itself first. Other considerations are less global and more pragmatic. Crises come and go, but allies (sometimes) remain.
Iceland, a rapidly developing economy and a happy hunting ground for businessmen from many European countries, is certain to remember this gesture and take more kindly to Russian investments in the future. So far, Russia-Iceland trade has been $100 million per year. And it was only shortly before the crisis that Russian business (represented by Roman Abramovich and Oleg Deripaska) began exploring the country's investment possibilities. Now the price for entering Iceland's economy could prove very low. Besides, it makes a good staging post for flights to Latin America.