Yuri Luzhkov, Moscow Mayor
The United States has slashed the refinance rate to a historical low - 0%-0.25%, the European financial authorities have cut it to 2.5%, and the Bank of England has approved a 2% rate. Japan, where the refinance rate has been traditionally low, has reduced it to zero, and China is also cutting the rate in an attempt to keep the national economy in the growth zone.
All of this is proof that traditional monetary methods are ineffective in the current economic crisis. There are now two ways of fighting it, the global way and the Russian way. It appears that the Finance Ministry has convinced the Government to opt for a specifically Russian way out of the crisis.
The thing is that the global and the Russian methods are diametrically opposite, and not because their economies differ. Over the past 20 years, capitalism, with all its advantages and disadvantages, has also come to Russia.
The point at issue is the philosophy the Russian financial authorities have pursued despite global changes, a philosophy of primitive liberal monetarism. Its main goal is to get as much as possible for the budget at all costs, even at a cost of the deterioration of national industry.
Why have the Russian Finance Ministry and Central Bank raised the refinance rate to 13%?
The refinance rate is the rate at which the Central Bank lends federal budgetary funds to commercial banks. It is the guideline for the banking sector and the national economy.
The issue of the refinance rate cannot be limited to the current global crisis. Russian financiers have always connected the rate to inflation, saying that if the inflation rate is high, the refinance rate should also grow, and made long pseudo-scientific speeches to prove their point.
Of course, we cannot reject these "effects, correlations, lags, and functions" outright, but we should also remember that all of this is virtual accounting. If we continue to rely only on it, we will not progress much, if at all.
They also say the refinance rate should be increased to restrain speculative attacks on the rouble. This argument is losing strength, however, now that the Central Bank is rapidly expanding the corridor for rouble fluctuations against the bi-currency basket, thereby gradually lowering the level of balance for the national currency.
Our liberal monetarists have always disregarded the producers' objective goals, so their current view of the economy merely as figures in a computer is nothing new.
Our bankers and financial bloc ministers have taken an incorrect view of the economic growth mechanisms. They have always thought that everything depends on a favourable export price situation created thanks to their money sterilisation experiments. They refused to admit that economic growth over the past few years was only recuperation after the Soviet period and the downturn of the 1990s, and were exploiting the possibilities offered by the thaw and use of idling capacities created in Soviet times. Another vehicle of economic growth in Russia was the devaluation of the rouble in the 1998 financial crisis.
All these factors and possibilities had been exhausted by 2007, when nobody thought of the imminent crisis. The situation has changed dramatically, but the Russian authorities refuse to admit this. Russian producers have worked for years in conditions of money shortage. They have never had, and still do not have, enough money for overhauling and expanding production and creating new capacities. They managed to resume production despite a lack of funds and investment, but the authorities' monetary policy effectively precluded a full-scale use of the investment growth model.
Undermined by monetarism, the Russian economy could not adequately satisfy the growing and increasingly solvent domestic demand. Dependence on imports continued to grow and has by now become alarmingly high. Many people did not see that as a problem, saying the main task was to "compact" the money mass. If that policy precludes domestic production, we will import what we need, they said.
At the same time, our producers were raising the prices of their products and services to raise funds for development from consumers. They were doing this, however, in a socially dangerous and economically inefficient way.
That policy of artificial deficit and unavailability of money resulted in a shortage of goods and a dependence on imports, and also slowed down modernisation of infrastructure and production capacities.
What do we have now?
The reaction to the crisis by other countries, above all the world's leading economies, points to their awareness of the dangers of monetary anti-crisis recipes. They have quickly stopped hoping that the market will settle everything, and admitted that such an economic policy can only lead to a social and political disaster.
This is why all industrialised countries are now pursuing an aggressive policy of lowering interest rates, to 0%-2.5%. They are also simplifying access to affordable loans for producers and consumers, and taking measures to maintain the consumer demand and the demand for housing and education.
The Russian Central Bank, however, has doubled the refinance rate to 13%. Has it done this to help national industry take out loans? Not at all.
How can producers take out loans when they need super-profitable projects to repay the principal and interest, not to mention an 18% VAT? What plant can boast such a profitability rate?
There are no such plants in Russia now. This means some companies will take their last breath from the loans' oxygen bag before succumbing to bankruptcy. Most other companies will face a no-win choice between taking out loans they will be unable to repay and declaring bankruptcy here and now.
There seems to be a positive element in this situation, as a higher refinance rate allows for increased interest on bank deposits and thereby a slowed outflow of money from people's bank accounts.
Russian banks have received assistance from the state and heaved a sigh of relief, but they have not invested that relief money in national industry, fearing that they would never get it back. They are having nightmares of clients lining up to withdraw their deposits, and think high interest rates may convince the people not to do so.
In fact, it would be much better to convince the people to buy more during the crisis conditions, because this will stimulate production and the market.
So, whom to help?
Some words effectively conceal the meaning. For example, it has been said on TV that assistance will be provided to strategic companies. It is good when the Government helps those who build housing, roads, and bridges, and produce goods needed by the people and industry. Assistance has been promised to individual enterprises and whole industrial sectors.
Only in this way can we stabilise the economy and create conditions for development. This brings us back to Karl Marx's forgotten C-M-C formula, Commodity-Money-Commodity. It is interesting that sales of Marx's main book, "Capital", have grown tenfold in Germany. Marx was a poor politician, but 19th-century economic genius.
Prime Minister Vladimir Putin convened a meeting of Government members and the heads of Russia's leading regions in Yaroslavl to discuss the situation and encourage joint work and mutual understanding. The idea is to encourage the regions and the Government to join efforts in overcoming the crisis. Indeed, we can only do this together. But how can we join efforts when the Finance Ministry has added a clause to the Budget Code prohibiting the regions to lend budget funds to their enterprises?
Budget loans benefit both the recipient enterprise and the region, because they help the enterprise to preserve jobs and the regional budget to collect taxes from a working enterprise. Today we are allowed to subsidise interest on loans, but this does not ensure that the region will get its due. The Finance Ministry is protecting the financial sector but not industry.
Why? Do they think the regions will squander the money, so that the Finance Ministry will have to make up for their spending from "its own" funds? It will never permit this, thinking that it would be better for the regions not to do anything if this will "save" the federal budget money.
As a result, we see two different trends in the Government. Prime Minister Putin has visited all the leading regions in a bid to help strategic enterprises, whereas the financial bloc is pursuing a different policy.
The world's leading countries have agreed to take collective action to fight the crisis, but have not gone further than consultations and declarations of intent. At the same time, countries are looking for ways to protect national producers.
They are drafting large-scale programmes of infrastructure development, which means creating new jobs, as well as temporary employment and social work schemes. The United States intends to spend up to $3 trillion for this purpose in the next few years. China has decided to allocate over $500 billion, even though it spent a comparable amount on the infrastructure for the 2008 Beijing Olympics.
When you don't know what to do, look at what others do and see if you can emulate their actions. We, however, are not drawing on the experience of other countries. Instead, we keep complaining about the inadmissibility of a budget deficit, although nothing can be done about it now. No progress has been made in increasing state investment in infrastructure development, although this is exactly what we should do now. The Government's pointed and direct assistance should be provided to practical infrastructure projects that will benefit the national economy, as well as to strategic enterprises.
Prime Minister Putin has announced that the quota for immigrant workers will be halved, which is a justified and timely measure based on employment trends. However, the migration quota has been changed in a very strange way at the bureaucratic level, and it now appears that it can be either cut or increased by 50%. This solution is sending the wrong signals to the employment market, business, and the Federal Migration Service.
When you are allowed to do either thing, the Federal Migration Service will be unable to ensure the implementation of the Government's decision to cut the number of guest workers. We can already see this happening. The Service has not done anything about Moscow's numerous complaints in this sphere; the Federal Migration Service has issued 500,000 work permits to the Moscow authorities, but only 147,000 immigrants who have them are now working in the city. Where are the rest, and what are they doing? According to law enforcement reports, immigrants commit 40% of the crimes in Moscow.
There are no clear answers to our questions.
Or take the problem of Ukrainian metal. Ukraine supplies over 2.5 million metric tons of metal goods to Russia annually. This may be good in a normal situation, but not when the demand for metal goods and global metal prices have plunged by 30%-40%. Russian metal producers are cutting production and are working to 50% of their capacities, at best. They have to cut production and send their personnel on leaves, mostly unpaid ones.
In this situation, we must enact tough measures to protect our market and our producers, at least temporarily. Russia has more possibilities for doing this than the members of the WTO, which is unlikely to survive the ongoing crisis anyway.
Despite its heroic efforts to enter the organisation, Russia has not become a WTO member due to the counteraction of Georgia, Moldova and, of course, the Untied States. This allows us to take emergency measures to protect our producers against imported materials, equipment, and foods during a crisis. We are free to act as we want to at this critical stage, and we must maximally protect our metallurgy, engineering, and agricultural industries from importers, but only during the crisis.
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The world is trying to overcome the crisis through more efficient management, cheaper loans, and depreciation of national currencies, trying to ensure that the money reaches the economy, industry, infrastructure projects, construction, and small business.
Russia, however, is moving in two directions simultaneously. The Government is working to support industry, whereas its financial policy, with super-high interest rates for industry and a failure to ensure that government allocations reach industry, is creating a dangerous situation.
The time has come to abandon the old dogmas. We must admit that financial markets have been creating problems for the global economy over the past few years, not solving them.
Relying on financial markets amounts to hoping without good reason that a new financial bubble will appear at some point to solve all our problems. Or, we can cut spending and investment, pushing the economy into stagnation and price growth.
This stagflation scenario is extremely dangerous for Russia and is nothing more - or less - than a repetition of the 1990s crisis.
