Monday, March 28, 2022

The Financial Fifth Column - Vox Popoli

Vladimir Putin’s economics advisor considers the probable effects of the massive globalist sanctions on Russia and concludes most of them can be negated with proper banking policies:

The damage caused by US financial sanctions is inextricably linked to the monetary policy of the Bank of Russia which is the ideal one for them. Its essence boils down to a tight binding of the ruble issue to export earnings, and the ruble exchange rate to the dollar. In fact, an artificial shortage of money is being created in the economy, and the strict policy of the Central Bank leads to an increase in the cost of lending, which kills business activity and hinders the development of infrastructure in the country.

Sanctions restrictions have caused an extremely high demand for corporate financing in the domestic market. Against the background of a relatively low key rate and access to cheaper funding, large banks consistently keep a net interest margin above the average market level, 5.4% to 6%; whereas for the largest banks in China, the USA, Germany, France, Great Britain and Japan, the net interest margin ranges from 0.8% to 2.3%.

However, these windfalls are not directed to financing infrastructure projects, but to the acquisition of disparate non-core businesses that are combined into ecosystems. Most of these businesses remain unprofitable even at the EBITDA [earnings] level. Despite this, billions of rubles are still spent on their development. These figures are quite comparable to the volume of investments in a major infrastructure project in the real sector of the economy, which can bring both job growth and contribution to the development of the economy. But such projects (as well as filling the budget) are still left to the raw materials companies, while the largest financial corporations prefer to direct their income to the creation of chimeras.

In fact, it was the connivance of the Central Bank which led to the fact that Russia and its industry were drained of blood and unable to develop.

If the Central Bank fulfilled its constitutional duty to ensure the stability of the ruble — and it has all the possibilities for this due to the threefold surplus of the currency reserves of the monetary base — then financial sanctions would be nothing to us. They could even be turned, as in other sectors of the economy, to the benefit of the banking sector, if the Central Bank replaced the loans withdrawn by Western partners with its own special refinancing instruments. This would increase the capacity of the Russian credit and banking system by more than 10 trillion rubles. Also, it would fully compensate for the outflow of foreign financing of investments, preventing a decline in investment and economic activity without any inflationary consequences. Thus, it would be possible to avoid a long period of decline in real incomes of the population caused solely by the peculiarities of the monetary policy pursued in Russia, which ensured the effectiveness of sanctions in the monetary and financial sphere.

Assessing the consequences of anti-Russian sanctions, it is impossible to ignore the consequences of severing economic ties with Ukraine. The mutual abolition of the free trade regime and the imposition of an embargo on a wide range of goods led to the rupture of cooperative ties that ensured the reproduction of many types of high-tech products. Blocking the work of Russian banks led to the depreciation of multibillion-dollar Russian investments. The refusal of the Ukrainian authorities to service the debt to Russia caused several billion dollars’ more losses. In total, their volume is estimated at about $100 billion for each of the parties. This is really significant and in many ways irreparable real damage, which we ourselves have aggravated with retaliatory sanctions.

To date, the outcome of the economic consequences of anti-Russian sanctions is as follows. Ukraine suffered the biggest losses relative to GDP, in absolute terms — the European Union. Russian losses of potential GDP, since 2014, amount to about 50 trillion rubles. But only 10% of them can be explained by sanctions, while 80% of them were the result of monetary policy. The United States benefits from anti-Russian sanctions, replacing the export of Russian hydrocarbons to the EU, as well as China; replacing the import of European goods by Russia. We could completely offset the negative consequences of financial sanctions if the Bank of Russia fulfilled its constitutional duty to ensure a stable ruble exchange rate, and not the recommendations of Washington financial organizations.

Consider the threats of American and European Russophobes against the new ‘sanctions from hell’. It has already been mentioned above that the threat of disconnecting Russian banks from the SWIFT system, widely discussed in the media today, although it will interfere with international settlements at first, will benefit the Russian banking and payment system in the medium term.

The threat to ban transactions with Russian bonds will also benefit us, since their issue in a budget surplus is nothing more than a source of profit for foreign speculators. And their profitability is overestimated three times in relation to the market assessment of their riskiness. The termination of the self-serving [самоедской] policy of the monetary authorities, who are borrowing money which is objectively unnecessary to the budget at exorbitant prices, will allow us to save billions of dollars. If the sanctioneers try to prohibit the purchase of the foreign currency bonds of Russian corporations, then it will be possible to compensate for the missing financing for the purchase of imported equipment by buying them out at the expense of part of the excess foreign exchange reserves. If foreign loans are cut off to them, then the risk of their default will fall on the European and American banks themselves.

There is also a potential risk of seizure of Russian state assets. But we can respond to this symmetrically by imposing an embargo on servicing debt obligations to Western creditors and also arresting their assets. The losses of the parties will be approximately equal.

There remains, in fact, one threat – to take away foreign assets from Russian oligarchs. For all its popularity among the common people, this will stimulate the return of capital exported from the country, which will also have a positive effect for the Russian economy.

The evils of free trade are such that the penalties imposed by its defenders are actually a long-term blessing. However, incompetent or treasonous monetary policy can harm any country, regardless of what its external trade possibilities are. In any case, sovereignty is always more important than sanctions or access to global markets, especially for a country rich in human potential and natural resources.