POLITRUSSIA, translated by Tom Winter -
The absolute leader in the ranking of the most critical news last week was the statement that the drop in Russian incomes has ended. Reactions to this -- in general a banal statement based on official government statistics -- ranged from mild-to-aggressive irony and denial.
This once again proves that expressing anything positive about the Russian economy in the public space is quite a risky business.
Looking at the Shuvalov interview Sunday on NTV, which discussed current economic problems and seeing the reaction to it, I came to the conclusion that it is time to talk about the negative myths about the Russian economy. [Igor Shuvalov - First Deputy Prime Minister of the Russian Federation - tr.]
I've been here before. In December 2014 yours truly wrote a positive text on the prospects of the ruble, at the time when the media and social networks were discussing forecasts of the financial gnomes of the coming 150-ruble-dollar. I wrote about the conflict of European and American elites when everyone was sure that the "transatlantic partnership" was about to get signed, and "Europe - a staunch US poodle"; and I believed that Trump had a chance to win, as mainstream political scientists and sociologists had completely written him off.
Go.
Myth 1: Everything's bad and going to get worse in the Russian economy.
Let's try to look at the situation without statistics, and official predictions. This news was already in the blog, but it is worth mentioning again just as a demonstration of an important principle.
What are the risks for a media expert, official or journalist, when giving a public assessment of the Russian (or any other) economy? Answer: none. Even reputation is not at risk, because in the modern world of total sound-bite consciousness, long-term reputational risks are virtually nonexistent, instead the audience has long since ceased to respond to analytical articles in the style of "Putin is in a trap" that have been going with punctual regularity for 15 years.
What are the risks for the businessman, when acting on his assessment of the status of the Russian (or any other) economy? Answer: If it is the manager, he puts his workplace at risk. If it is the owner it is money at risk, serious money. This rule applies doubly to those who represent the real economy, rather than the "hot money," which lives mainly in the financial markets. Shares of Gazprom you can buy and sell in a single click, but building a factory or even a large shopping center is a very long-term and costly investment, which will not even sell in the case of serious economic problems.
According to Bloomberg, Western companies have resumed investments in Russia.
This news calls to our attention the specific companies which have resumed investments in Russia - IKEA, Leroy Merlin, Mars, Pfizer. They are united by the fact that they earn on the sale of products to the average consumer, rather than to state or private companies. And to invest in the production and sale of furniture, sweets, and, medicines needs to justify itself in future increased revenues for the ordinary Russians in the foreseeable.
So now we have three ways to interpret the situation:
- Management and shareholders of large private companies focussing on the end user have swallowed a whole pack of hogwash on the assessment of specific markets of various countries -- one and all are fools who do not know that "Russia is dying, people are impoverished, and getting worse off" as the business media and commentators in social networks tell us.
or
- There are serious reasons to believe that the fall in incomes of Russians is over and can be expected to follow the growth that justifies the investment in our country.
or
- Bloomberg, IKEA, Mars, Pfizer and other companies have entered into an agreement with Putin in order to deceive the internet's "true patriots."
The choice is yours.
Myth 2: Russia does not have a sovereign financial system
This myth - a perfect example that it's easy to keep an illusion in the public consciousness, and that no reality can dislodge it. Our financial system in 2014-2015 was disconnected from USD credits and, to be precise, disconnected from borrowing opportunities in the US and European financial system. Completely. Completely. Remember 2014 and 2015, when the Western media and their local counterparts had expected any day now, the Russian banking system will arrive at a collapse followed by a chain reaction of bank failures and subsequent bankruptcies of enterprises with no access to foreign loans. well, did it come true? Even opponents of Russia in the West recognize it didn't. The financial system, which suffered a shutoff on Western credits has passed the best test of "sovereignty".
I am sure that in the commentaries they will write about the fact that part of the foreign exchange reserves are invested in dollar-denominated bonds. The topic has been discussed many times, and so far I have none of those who believe in the thesis "Russia, a colony" have given an answer the question: China and Venezuela are also colonies? And are comrades Xi and Maduro "viceroys" of the US? Or of a world government or of reptiloids? China is the largest holder of US bonds, Venezuela is also of holder of US bonds, despite the fact that that country there is a most severe economic crisis.
By the way, I want to recall another "horror story" about the dependence of the Russian financial system on the US VISA, Mastercard and SWIFT. I think that all readers will remember about how they threatened Russia with a stoppage of payments and electronic commerce. Two years have passed and the stores of the country are increasingly adopting the wholly domestic MIR system. VISA and Mastercard not only have not left the country, but also have given the Central Bank a monetary pledge of their good behavior. As for the SWIFT, the Obama administration was afraid to turn it off, so as not to accelerate the creation of alternative systems, although work on alternatives is ongoing.
We return to the question of foreign lending and its stoppage because of the sanctions. Now the governments of developing countries are scratching their heads over what to do with the shock, which will inevitably be caused by the increase in the dollar value because the Fed probably will raise the interest rates on the dollar. We have no such a headache and there won't be a shock, as the economy has survived and adapted to work even when fully disconnected from them. The peak of our problems has passed, and for many of our neighbors and allies it has yet to come.
We survived without foreign lending and financing, so that when Shuvalov, in the NTV interview, said that the Russian financial system is a sovereign one, he's right. This does not mean that it has no problems. Problems there are, but the lack of fiscal sovereignty - that goes for Ukraine, and not for Russia.
Myth 3: It is urgent to set the mortgage rate at 2% (or 0%!), And then there will be enough housing for everyone and everything will be fine.
Complaints on the Russian mortgage system have been met before, but once in the same interview with Shuvalov, the NTV journalist was persistently interested in when will the mortgage rate in Russia be below 10%, it is necessary to conclude that the question overripe.
For resolving the housing problem, there are two kinds of decisions: a simple but wrong one, and a correct but complex one.
"Drop rates to the floor" is a resolution in the first category, i.e. simple and wrong, since it leads to a situation of explosive growth in property prices and a strong increase in the debt load of the population. Sweden povides a case study. There the ultra-low mortgage rates (and the prime rate of the Swedish central bank was generally negative) led to the fact that the real estate market formed a classic bubble, and the length of the mortgage loans reached astronomical figures, with loans transferred to "inheritance." The Swedish central bank had to legislatively limit the deadline for a mortgage and now it is "only" 105 years. This is not a typo. Maximum length of a mortgage loan is 105 years, while the average duration of payments on the Swedish mortgage, as reported to us in The Telegraph, is 140 years.
The correct, but complicated solution - this is what the Russian state is doing, albeit insufficiently. Actually, it is what Shuvalov himself tried to explain to the journalist. Mortgage with state support and a gradual decrease in rates with a decline in inflation is good; development of "rental housing" with option to buy - a good idea, but lamentably, it is slow to be realized; the development of a mortgage bond market to solve the problem of housing construction - also good, but it is important not to repeat the American precedent, but it is important not to repeat the American precedent, where this market practically choked up the entire financial system.
So the movement to address the housing problem is going in the right direction and the president is tweaking the speed of the adjustments. It's unavoidable. That's the specifics of our public administration.
Myth 4: CBR [Central Bank of Russia] - the enemy of Russia, stifling the Russian economy with high rates
Why the NTV journalist faulted Shuvalov with claims related to the activities of the Central Bank is not very clear, because he is not responsible for the monetary policy of the Central Bank, but it is good that the Deputy Prime Minister has supported aiming at inflation rather than at a free-for-all from the standpoint of the populist option "just print money and give it to everyone."
In discussions with the proponents of an immediate reduction of interest rates and the distribution of cheap money for the sake of "economic recovery," I always ask two questions:
- Why in Venezuela, where the principle of "give cash to everyone," was elevated to a dogma of economic policy, and fresh banknotes were brought into the country by transport aircraft, did even the toilet paper suddenly disappear from the shelves, and the food stores resorted to outting themselves under pooice protection?
- Why in the Republic of Belarus, which the illiberal Lukashenko runs, and where there is no Nabiullina [Elvira Nabiulina is governor of the Central bank. For more click], is the local Central Bank rate 18%, i.e. much higher than in Russia?
To understand why it is impossible to transfer the entire Russian banking system (or even all of its public part) to the scheme of "supercheap loans to enterprises," just look at the specific positive (underlined in red: positive) example of a state bank, which operates under such scheme.
There is a state-owned bank - the RAB - Russian Agricultural Bank, that provides loans to Russian agriculture. The bank often works with borrowers who (for various reasons) will not bother any public or private bank that doesn't know, or want to know, how to properly assess a cowshed or a cheese factory. Without RAB loans in Russia it is impossible to conduct normal sowing or harvesting, that is, actually "feeding" the country. Moreover, under certain conditions, agricultural producers can get a bank loan practically under 4-5%, and the for rest of the rate the state compensates the bank. It would seem that it's an economic nirvana. But there is a nuance. Despite the fact that Russian agriculture is growing, the Russian Ag Bank operates at a loss, and it is unprofitable on a systematic basis.
The government every year, in order to preserve the functioning of the agro-industrial sector of the country, pumps tens of billions of rubles into the bank: In 2016 the bank was additionally capitalized by 8 billion rubles, in 2015 -. 10 billion rubles. plus another 68.8 billion rubles in the federal Loan Bond program. [OFZ - Облигации федерального займа - Obligations of Federal Bond]
The obvious question is: RAB each year finds money to cover their losses "on the bedside table," i.e. in the state budget, but on what bedside table will the Russian state find the money, if the entire banking system were to go to such a scheme? Of course, money can be printed, but then sadly our country would quickly and decisively end up in Venezuela or Zimbabwe mode,.
Magic and simple solutions don't happen. The gradual decline in rates, combined with a decline in inflation and the build-up of targeted funding (subsidy) of key sectors (for example, Russian Ag Bank, the Industrial Development Fund, etc.) are the only realistic approach that will ensure sustained and secure economic growth.
Year's end draws near, and it is traditionally accompanied by an epidemic of apocalyptic predictions. Economic apocalypse will not happen. There is stability in the sense that we will over and over again talk about how "Russia is dying," but the Russian economy has a good chance of catching cold at the funerals of those, over the years, that it buries.
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