Russian government sacrifices wages to save oligarchs
By Renfrey Clarke
MOSCOW — After weeks of being a "certainty", there will be no crash of Russia's speculative, mafia-infested banking system — not yet, anyway. Instead, the crash is likely to take place in the living standards of anyone in the country whose income is in roubles, rather than dollars, or who is not well-placed in financial or resource-exporting circles.
This is the upshot of a deliberate choice made in mid-September by the new government of Prime Minister Yevgeny Primakov. Understanding that if it did not capitulate to Russia's most powerful business magnates — the so-called oligarchs — it would have to mount a serious offensive against them, the government opted for surrender.
On September 18, banks in Moscow, St Petersburg and several other important regions took part in a state-supervised "debt swap". This was intended to overcome the paralysis that had gripped the banking sector since August 17, when the previous government of Sergey Kiriyenko devalued the rouble and defaulted on huge sums in short-term bonds.
In technical terms, the banks were permitted on September 18 to settle their debts with the state, their depositors and one another by borrowing from the reserve funds they are required to lodge with the Central Bank.
In a later process completed on September 19, the banks were allowed to "pay back" the new loans using the bonds on which Kiriyenko's government had earlier refused payment. But this repayment was fictitious, since the bonds were almost worthless. The Kiriyenko government defaulted on them because it had no way of raising the money to redeem them. Simply issuing unbacked credits — often described by journalists as "cranking up the printing presses" — was considered, at the time, to pose an unacceptable risk of sparking uncontrollable inflation.
The new authorities do not share Kiriyenko's scruples. Because the "debt swap" credits are effectively a gift, Primakov's manoeuvre means that billions of new roubles, backed by nothing more than thin air, have entered the general money supply. According to the English-language Moscow Times on September 22, the Central Bank put the additional sum at 4.2 billion roubles, about US$250 million.
While this is only about 4% of the total money supply, analysts fear it will have a catastrophic "trigger" effect on price rises. At 43% in the first two weeks of September alone, these are already in the hyperinflation range.
Increased inflation is virtually guaranteed by the use to which many of the banks are expected to put their newly restored liquidity. Buying dollars, forces down the rouble rate and raises the cost of imports, which account for around half the purchases made by the Russian population.
Nationalisation
Was pumping up the banking system with unbacked credits the best choice available? Central Bank deputy chairperson Andrei Kozlov insisted on September 18 that it was. "The negative consequences of this action are less than of any other", Reuters quoted him as saying. 1
But this is not true. The government had a perfectly workable alternative to emitting money: it could have nationalised the banks.
With the banks under state management, their debts to depositors could have been paid out or put on hold in line with the government's real possibilities. The available funds could have been directed, not toward currency speculation, but toward ends such as maximising production, employment and the payment of wages.
All this would have met with furious resistance from the oligarchs, backed up by western governments and financial interests. The Russian banking sector, along with energy and raw materials exports, represents a vital component in the business empires of the country's most notorious "crony capitalists".
The resistance of the business moguls could, however, have been effectively countered through mobilising Russia's workers and poor — that is, the prime victims of inflation. At a time when the oligarchs are weaker than at any time since the early 1990s, mass demonstrations could have forced them to swallow their losses.
But there is no point in looking to Primakov to call such actions. A long-time senior Pravda correspondent and foreign policy adviser, Primakov served the Soviet elite faithfully for decades, and remains loyal to them now that they have metamorphosed into owners of capital.
With the decision to emit billions of roubles to bail out the banking sector, many of Primakov's utterances on the economy have to be regarded as pure demagogy.
In an interview published on September 20 in the German newspaper Bild am Sonntag, the PM stated: "The biggest problem to tackle is that of [unpaid] salaries and pensions." He also pledged to boost industrial and agricultural production.
The question of whether unbacked credits could be used to pay wage arrears without disastrous results has been the topic of sharp debate in Russia in recent weeks. In an article in Nezavisimaya Gazeta on September 16, prominent economist Leonid Abalkin maintained that the Russian economy was heavily demonetised, and that there was a need for controlled emission to drive pseudo-money, such as bartered goods and promissory notes, out of circulation.
Solutions for the rich
It could be argued that paying wage and pension arrears would have been an ideal mechanism here, since the roubles would not as a rule have been used to buy dollars, but to purchase basic consumer goods. The extra money would thus have translated directly into additional demand for the products of Russia's heavily depressed consumer manufacturing and agriculture.
But now that unbacked credits have been poured into saving the private banking system, and inflationary expectations are at extreme levels, there seems no possibility of paying off wage and pension arrears without sending prices into orbit.
Deputy PM Aleksandr Shokhin admitted as much on September 20 when he ruled out emitting more money to meet wage and pension payments, saying it would depreciate the rouble. "The second best option is to attract external resources to pay our obligations", he said.
"External resources"? Who is going to lend money to Russia now? What Shokhin could not bring himself to say is that the government has no serious plans for meeting the arrears. The sum that might have been used to begin this process has been given to the oligarchs.
Primakov's weakness for "solutions" that fail to challenge the rich and do nothing for the ordinary population is showing up in other areas as well.
To curb the "dollarisation" of the Russian economy, restrict capital flight and build up the Central Bank's hard currency reserves, the new PM has promised to tighten controls on the foreign exchange market.
According to the Moscow Times, the Central Bank on September 18 announced it had drafted a presidential decree requiring exporters to sell 25% of their foreign currency revenues to the Central Bank, in addition to the 50% that already has to be sold through the currency exchange.
However, analysts quoted by the paper pointed out that the new measure would encourage exporters to conceal their earnings, and implied that they would have little trouble doing just that. The inflow to the Central Bank's reserves, the sources predicted, would not be great.
The Russian state's reserves of hard currency and gold were badly depleted during the effort, abandoned on August 17, to maintain an artificially strong rouble. Replenishing these reserves is vital if the government is to have even a medium-term prospect of stabilising its finances.
If exporters — above all in the oil, gas and metals sectors — sabotage this effort, the case for nationalising their firms is strong. But after rescuing the oligarchs' banking interests, Primakov is hardly likely to strip the business chiefs of their energy and raw materials operations.
The banks
Meanwhile, what are Russian banks like, that the prime minister should be willing to risk sending inflation over the moon to keep them in business?
In all but a few cases, these institutions bear little resemblance to banks in the west. The great majority have no interest in building up a large network of depositors. Few provide anything remotely like western-level services to their clients. Only a handful have a record of lending substantial sums to producers in the "real economy".
Instead, the banks have made high profits out of currency manipulations and from lending to the government on the short-term debt market. Many, especially among the smaller ones, are reputed to be fronts for mafia money-laundering operations.
The banking industry has also played a big role in expediting illegal capital flight, estimated at a staggering US$140 billion over the past seven years.
Such are the institutions that Primakov, at serious peril to Russia's economy and society, has now plucked from the gutter and set back on their unsteady feet.