Konstantin Sonin
Which factors attest to Russia's preparedness to weather the current financial storm?
First of all, a great amount of foreign exchange reserves and a small state debt. Due to the well-conceived ideas that were timely proposed by former Presidential Advisor Andrei Illarionov, Russian Finance Minister Alexei Kudrin's untiring efforts, and ex-President Vladimir Putin's political support, the state debt has been repaid and foreign exchange reserves accumulated despite lobbying within the elite groups and pressure from public opinion.
Moreover, by investing these funds in less risky assets, including the American Treasury bonds and bonds of the US Fannie Mae and Freddie Mac mortgage companies, Russia has earned a tangible profit. (We would have lost money if we had invested it in these companies' shares, but by investing in bonds, we profited from the transaction).
Regrettably, it is not the size of accumulated reserves, but who administers them and how that is important, as well as the level of market players' confidence in those agencies (in regards to the foreign exchange market, market players are the country's whole population). The past week has shown that the Central Bank's positions are not too strong. The bank has sufficient reserves to maintain a stable rouble exchange rate, but the people and the market do not believe this.
Prime Minister Vladimir Putin's assurances are not convincing enough, particularly because he is seen by the Russians (at a subconscious level) as a figure who is too strong politically to be tied by any commitments. Meanwhile, Mr Putin promised to use the reserves to repay Russian companies' debts and support investment programmes.
It is now necessary to divide the Central Bank's foreign exchange reserves into two parts: one part will be used to support the rouble exchange rate, and the balance can be used for other purposes. The TV responsibility zones should also be divided. Sergei Ignatyev, the Central Bank's head, should appear in all TV news explaining the bank's currency policy and confirming it with figures. Someone else, perhaps First Deputy Prime Minister Igor Shuvalov or Finance Minister Alexei Kudrin, will tell how the balance will be spent. (It is impossible to understand those who organise TV broadcasts of Mr Putin's economic statements: the negative reaction of both the population and the market has been clear, as distinct from the reaction to his statements on foreign policy. It is important that money really be divided in the minds of the TV viewers (who are also the participants in the foreign exchange market).
There was a joke about Viktor Chernomyrdin, Russian Prime Minister in the mid-1990s, that he received the world's most costly economic education. For the current Prime Minister who, in his ninth year in office, is facing real economic problems, the cost of economic education may prove even higher than for Chernomyrdin.
The author is a professor at the Russian School of Economics.
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It is not the size of accumulated reserves, but of the level of confidence of the market players and the country's entire population in the agencies (or persons) administering the reserve funds that is important.
