Jacques Sapir — Russia and Global Finance

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.

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.…

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.…

These excerpts focus on the central bank. The post analyzes the Russian economy and financial system in greater depth, showing that the issue is really not economic but financial, with finance bound up in global finance to the detriment of Russia, and by implication other countries other than the Atlanticists that control global finance under the dollar system.

Sapir is one of the few people in the West I have encountered to recognize that the Central Bank of Russia is the chief problem. The heterodox wing of Russian economists knows this and has been lobbying for a change in policy. This crisis presents a perfect opportunity for restructuring but that requires domestic financing. The Central Bank of Russia is being an obstacle instead of facilitating restructuring as the issuer of the ruble.

This analysis reveals the pressing need to get MMT materials translated into other languages and more widely distributed.

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Russia and Global Finance
Jacques Sapir