Please don’t speculate too accurately about classified matters, Edward. It’s hard to imagine the U.S. bumping you ahead of actual spies and basketball players on the exchange list.
Aug 6, 2022·edited Aug 6, 2022Liked by Edward Slavsquat
If, given a choice, a particular fiscal policy action is going to work against Russian economy, we can be assured that Russian CB under Nabiullina will make that choice. Today in interview on radio Sputnik notable Russian economist, Mikhail Khazin, accused the management of Central Bank of "high treason" - this is the harshest accusation of CB I've heard to date at this level. While Russian gold problem is important, just like the water always finds its way through the cracks, so will Russian gold find the way to international markets, since gold is an untraceable store of a well preserved value.
The more important problems in Russia, as they relate to CB policy, they have actually two problems:
1. In Russia, that starts to experience sanctions induced economic slowdown that creates conditions of stagflation and deflation, the CB base interest rate is now at 8% after it was recently dropped from 9.5%. This results in business and consumer cost to borrow money at well above 10% annual rate. It is pretty clear to any serious economist in Russia advocating economic growth that CB base rate should be 2%-3% maximum with the end consumer-business rate at 4%-5%, but CB continues suffocating Russian economy through high interest rates and keeping overall liquidity (printed available money) low.
2. Another problem, especially for business and particularly for manufacturing business is the collateral problem. Even with low interest rates, at, let say, 5%, that doesn't completely consume profit margin that doesn't go beyond 10% in manufacturing sector they are factually banned from taking new loans, because their factories have already been submitted as collateral for prior loans. This is, btw, how Russian industry that came as legacy of USSR's great industrial might was decimated back in the nineties - through "collateral auctions", but this is a topic for a separate comment. You may argue, but that is a problem between the private bank and a borrower? Actually no, Russian CB rules oblige private banks to secure collaterals for their loans or risk losing banking license for not complying.
Overall to better understand economic situation in Russia one needs to know the following fundamentals:
1. Russian currency, the ruble, is a sanitized dollar. Amount of the currency that Russian CB can print is limited not by economic need, desired liquidity level, inflation etc. It is limited by the foreign reserves of the CB, essentially by how many dollars they have. This was the agreed upon model after USSR capitulated after the Cold War back in 1989 and CB religiously stays true to this agreement. This is why Nabiullina gets praises from the Western officials and press. In 2015 she was recognized as the best Central Bank president in the world by the Euromoney magazine after she devalued ruble by 50% in a space of two months in 2014.
2. Neither Putin, nor his government have full authority over Russian finances. While there is always some play in this regard, Russian fiscal authorities, including Ministry of Economic Development and Ministry of Finance are free to drive their own policy that can diverge 180 degrees from the needs and wants of the rest of the government. For example, in order to create new weapon classes and overall stronger army they had to organize almost a clandestine program, totally nontransparent to the own fiscal authorities and drive it for over a decade. That much is true for US as well, except that this approach of "black military budget" was executed for many decades. Remember what Donald Rumsfeld said about Pentagon's "black budget" just ahead of the events of 9/11.
Hope this longer comment will help those who want to know to better understand what is going on with Russian finances.
Thank you Edward. I was was wondering what was going on with gold in Russia. I suppose not self respecting statist wants a gold backed currency. They only consider it for a time when the people loose confidence in the state issued currency, but even then they try to get by without it (e.g. Weimar Germany around 1923).
Not sure but this may be related to what's going on now.
From wikipedia. Russia tries to establish a gold standard and gets undercut by England
"The free trading of gold was prohibited, leaving the Russian State Bank as the sole exclusive purchaser of gold. While the Tsar's government had always shown great interest in accumulating gold, its enthusiasm for mining the metal especially increased in the 1890s due to financial reforms implemented by Russian finance minister S.Y. Witte and the introduction of the gold currency. After 1902, owing to the connections of Gintsburg, the Lena partnership found itself in a unique position. The State Bank extended it an unlimited long-term line of credit amounting to 6–7 million rubles. One of the bank's directors N.I. Boyanovskiy was included in the partnership's board of directors to exert a measure of financial control, and I.N. Belozerov, a protege of the State Bank, was appointed as chief manager of the mines. In supplying the Lena partnership with money, the Bank was interested not so much in earning a profit as in solidifying the gold-mining industry as a foundation of the state financial system. Gintsburg and the other shareholders, on the contrary, were keen to capitalize on profit and to receive the maximum possible dividends; therefore, a decision was made whereby the partnership had to become independent from the bank and search for a more cooperative lender.[5]
In 1907—1908, such a lender was easily found in London, where a group of English financiers headed by Lord Harris,"
After the Soviet's took power they made a deal and were allowed to continue their operation as long as the Soviet government got a cut. This agreement was originally for 50 years which would have taken it to the mid 70s. The company being a fully owned English company in 1919. It was deemed "the London Branch of "the Russian and English Bank" and continued to operate until 1928 or 1928.
"As late as Sept. 1928 the Government was continuing its efforts to attract foreign capital, but a shift in policy was already in prospect. Before the end of the year some foreign concessionaires were facing government charges of non-fulfillment of contract and a new period of confiscation was soon under way. Of 59 foreign enterprises operating in U.S.S.R. late in 1928, none was left at the outbreak of World War II. Miss Lewis adds that "among
the companies taken over were the famous Lena Goldfields and 5 other British enterprises, a German agricultural concession (Drusag) in which the German Government had a large investment, and a flourishing Austrian textile mill (B. Altman) ."
Stalin basically crumbled up the agreement and threw it n the trash. Then he agreed to arbitration.
"The arbitration proceedings conducted in 1930 by Lena Goldfields,
Ltd., London, against the Soviet Government constitute one of the most
remarkable occurrences in the field of arbitration. It is the only arbitration, in fact the only international law case, in which the Soviet Government was a party.1 Of still greater significance are the actions taken
in the case by the Soviet Government and the problems to which they
gave rise. The implications extend beyond the legal area and impart to
the case a lasting interest. It has been repeatedly referred to in recent
publications,2 but it has not yet been discussed in detail, probably because
the material is not readily available. In the following an attempt has
been made to fill the gap"
This went on for several years util 1950 where they were unable to come to an agreement.
Please don’t speculate too accurately about classified matters, Edward. It’s hard to imagine the U.S. bumping you ahead of actual spies and basketball players on the exchange list.
If, given a choice, a particular fiscal policy action is going to work against Russian economy, we can be assured that Russian CB under Nabiullina will make that choice. Today in interview on radio Sputnik notable Russian economist, Mikhail Khazin, accused the management of Central Bank of "high treason" - this is the harshest accusation of CB I've heard to date at this level. While Russian gold problem is important, just like the water always finds its way through the cracks, so will Russian gold find the way to international markets, since gold is an untraceable store of a well preserved value.
The more important problems in Russia, as they relate to CB policy, they have actually two problems:
1. In Russia, that starts to experience sanctions induced economic slowdown that creates conditions of stagflation and deflation, the CB base interest rate is now at 8% after it was recently dropped from 9.5%. This results in business and consumer cost to borrow money at well above 10% annual rate. It is pretty clear to any serious economist in Russia advocating economic growth that CB base rate should be 2%-3% maximum with the end consumer-business rate at 4%-5%, but CB continues suffocating Russian economy through high interest rates and keeping overall liquidity (printed available money) low.
2. Another problem, especially for business and particularly for manufacturing business is the collateral problem. Even with low interest rates, at, let say, 5%, that doesn't completely consume profit margin that doesn't go beyond 10% in manufacturing sector they are factually banned from taking new loans, because their factories have already been submitted as collateral for prior loans. This is, btw, how Russian industry that came as legacy of USSR's great industrial might was decimated back in the nineties - through "collateral auctions", but this is a topic for a separate comment. You may argue, but that is a problem between the private bank and a borrower? Actually no, Russian CB rules oblige private banks to secure collaterals for their loans or risk losing banking license for not complying.
Overall to better understand economic situation in Russia one needs to know the following fundamentals:
1. Russian currency, the ruble, is a sanitized dollar. Amount of the currency that Russian CB can print is limited not by economic need, desired liquidity level, inflation etc. It is limited by the foreign reserves of the CB, essentially by how many dollars they have. This was the agreed upon model after USSR capitulated after the Cold War back in 1989 and CB religiously stays true to this agreement. This is why Nabiullina gets praises from the Western officials and press. In 2015 she was recognized as the best Central Bank president in the world by the Euromoney magazine after she devalued ruble by 50% in a space of two months in 2014.
2. Neither Putin, nor his government have full authority over Russian finances. While there is always some play in this regard, Russian fiscal authorities, including Ministry of Economic Development and Ministry of Finance are free to drive their own policy that can diverge 180 degrees from the needs and wants of the rest of the government. For example, in order to create new weapon classes and overall stronger army they had to organize almost a clandestine program, totally nontransparent to the own fiscal authorities and drive it for over a decade. That much is true for US as well, except that this approach of "black military budget" was executed for many decades. Remember what Donald Rumsfeld said about Pentagon's "black budget" just ahead of the events of 9/11.
Hope this longer comment will help those who want to know to better understand what is going on with Russian finances.
Good article Riley will be linking today @https://nothingnewunderthesun2016.com/
Thank you Edward. I was was wondering what was going on with gold in Russia. I suppose not self respecting statist wants a gold backed currency. They only consider it for a time when the people loose confidence in the state issued currency, but even then they try to get by without it (e.g. Weimar Germany around 1923).
Not sure but this may be related to what's going on now.
From wikipedia. Russia tries to establish a gold standard and gets undercut by England
"The free trading of gold was prohibited, leaving the Russian State Bank as the sole exclusive purchaser of gold. While the Tsar's government had always shown great interest in accumulating gold, its enthusiasm for mining the metal especially increased in the 1890s due to financial reforms implemented by Russian finance minister S.Y. Witte and the introduction of the gold currency. After 1902, owing to the connections of Gintsburg, the Lena partnership found itself in a unique position. The State Bank extended it an unlimited long-term line of credit amounting to 6–7 million rubles. One of the bank's directors N.I. Boyanovskiy was included in the partnership's board of directors to exert a measure of financial control, and I.N. Belozerov, a protege of the State Bank, was appointed as chief manager of the mines. In supplying the Lena partnership with money, the Bank was interested not so much in earning a profit as in solidifying the gold-mining industry as a foundation of the state financial system. Gintsburg and the other shareholders, on the contrary, were keen to capitalize on profit and to receive the maximum possible dividends; therefore, a decision was made whereby the partnership had to become independent from the bank and search for a more cooperative lender.[5]
In 1907—1908, such a lender was easily found in London, where a group of English financiers headed by Lord Harris,"
After the Soviet's took power they made a deal and were allowed to continue their operation as long as the Soviet government got a cut. This agreement was originally for 50 years which would have taken it to the mid 70s. The company being a fully owned English company in 1919. It was deemed "the London Branch of "the Russian and English Bank" and continued to operate until 1928 or 1928.
"As late as Sept. 1928 the Government was continuing its efforts to attract foreign capital, but a shift in policy was already in prospect. Before the end of the year some foreign concessionaires were facing government charges of non-fulfillment of contract and a new period of confiscation was soon under way. Of 59 foreign enterprises operating in U.S.S.R. late in 1928, none was left at the outbreak of World War II. Miss Lewis adds that "among
the companies taken over were the famous Lena Goldfields and 5 other British enterprises, a German agricultural concession (Drusag) in which the German Government had a large investment, and a flourishing Austrian textile mill (B. Altman) ."
Stalin basically crumbled up the agreement and threw it n the trash. Then he agreed to arbitration.
"The arbitration proceedings conducted in 1930 by Lena Goldfields,
Ltd., London, against the Soviet Government constitute one of the most
remarkable occurrences in the field of arbitration. It is the only arbitration, in fact the only international law case, in which the Soviet Government was a party.1 Of still greater significance are the actions taken
in the case by the Soviet Government and the problems to which they
gave rise. The implications extend beyond the legal area and impart to
the case a lasting interest. It has been repeatedly referred to in recent
publications,2 but it has not yet been discussed in detail, probably because
the material is not readily available. In the following an attempt has
been made to fill the gap"
This went on for several years util 1950 where they were unable to come to an agreement.
And now we have a gold heist in Russia.
So: Can foreigners import their gold holdings into Russia if they have them? (i.e. without paying VAT.) Asking for a friend.
Thanks, Riley, for trying to scrutinize the inscrutable. Sounds like the central bank is trying to prop up illusions while really doing nothing.