About the central bank not responsible for state obligations

To win in the Special Military Operation requires the economic mobilization of the country. The Special Military Operation has been going on for almost ten months and there are no signs of such mobilization.

Let's face it: the decisive role in managing the Russian economy lies not with the government, but with the Central Bank. The Federal Law on the Central Bank clearly states that it is an institution independent of the state and “is not responsible for the obligations of the state.” Therefore, the calls of the President of the Russian Federation for economic mobilization, for the restoration of Russia's economic sovereignty, are not addressed to the Central Bank. It has a different task: “targeting inflation.” And I have repeatedly written that “inflation targeting” comes from the vocabulary of the “Washington Consensus.”

The fact that the management of the economy is in the hands of the Central Bank is not an exaggeration. In Russia, which took the path of capitalism more than 30 years ago, money is the main tool for managing the economy, and it is in the hands of the Central Bank, which is independent of the state and has the ability to print. Moreover, in 2013 the Central Bank received the status of a financial mega-regulator, which gives it the right to intervene in almost all areas of economic life.

The Central Bank has real instruments for managing the economy.

First, the key rate, with which it determines interest rates for many financial instruments (bank loans, deposits, debt securities, stocks, etc.).

Second, the printing press; With this instrument the Central Bank determines the amount of money in circulation.

Third, the stock exchange on which currency and securities transactions are conducted.

Fourth, commercial banks (the Central Bank Act states that it exercises banking supervision and regulation of banking activities).

Fifth, insurance companies, investment funds, pension funds, microfinance organizations and other financial market participants (the Central Bank received the right to command these organizations in 2013, when it became a financial mega-regulator).

Sixth, financial market infrastructure institutions- rating agencies, depositories, the aforementioned exchanges; in the near future, the Central Bank plans to bring audit firms under its control.

In addition, the Law on the Bank of Russia gave the Central Bank the right to initiate legislation on key economic policy issues such as currency regulation and the regime of cross-border capital flows.

The so-called independence of the Central Bank hides the control over it, which (at least until February 24, 2022) was exercised by supranational institutions. First, the Bank for International Settlements (BIS) in Basel. The central bank's share in the authorized capital of the BIS is 0.57 percent. This share predetermines the status of the BIS as a “minority shareholder,” which has no special rights but is obliged to abide by the decisions of the “majority shareholders” (the U.S. Federal Reserve, the ECB, the Bank of England, the Swiss National Bank and several other major central banks). Then the International Monetary Fund (IMF), aimed at ensuring that the Central Bank of the Russian Federation implements the principles of the “Washington Consensus” in Russia (maximum monetary liberalization, deregulation of the economy, elimination of any restrictions on the cross-border movement of capital, admission of foreign investors into the economy).

The Central Bank of the Russian Federation also participates in the capital of the Society for International Interbank Financial Communications (SWIFT, Belgium). That, however, did not become a protection against blocking the operations of Russian banks through this system after February 24.

In addition, the U.S. Federal Reserve System (it is considered the U.S. central bank, but the owners of the private company FRS are also non-U.S. shareholders; that is, it is a private supranational structure). As for the U.S. Federal Reserve on Neglinka (the address of the Bank of Russia's main office), earlier this year they said that the Central Bank of the Russian Federation, they say, would distance itself from the U.S. dollar and the U.S. monetary authorities. And they said only about $2 billion remained in its portfolio of U.S. Treasury securities, but they were silent that the dollar portion of the foreign exchange reserves is much larger. Basically, it is U.S. dollars on bank deposits of foreign banks. As of January 1, 2022, according to the annual report of the Bank of Russia, it had assets of $66.8 billion. (13.9 percent of all foreign exchange reserves).

Article 75 of the Constitution of the Russian Federation states, “Protecting and ensuring the stability of the ruble is the main function of the Central Bank of the Russian Federation, which it performs independently of other state authorities.” And instead of “protecting and ensuring the stability of the ruble” in 2013-2014 appeared ... “inflation targeting.” This led to the fact that in December 2014 there was a currency crisis in Russia: the exchange rate of the ruble against the dollar collapsed twice. The Russian economy suffered unquantifiable damage. And in early 2015, the government was forced to allocate about 2 trillion rubles of emergency assistance to eliminate the most serious damage. In March 2014, the West imposed sanctions against Russia, and in the first year of sanctions, the loss of the Russian economy, according to experts, reached 1.2 percent of GDP, or nearly 950 billion rubles. However, the losses due to the currency crisis caused by the Bank of Russia were greater.

I already wrote this on Dec. 15, Russian President Vladimir Putin gave a great speech at a meeting of the Council for Strategic Development and National Projects. The report identified six key challenges for 2023. Almost all of the tasks involve economic mobilization in the form of increased investment in the creation of new production assets and economic and social infrastructure. However, the recently adopted federal budget for 2023 does not include increased state investment in accelerated manufacturing development (taking inflation into account, investment will remain at approximately the 2022 level). Perhaps the emphasis is on private sector investment? No: domestic sources of private enterprises are not enough for this. There is a need for loans. First, long-term. Second, economic. V. Putin, at the time of his speech to the Council, the Central Bank's benchmark rate was 7.5 percent. At such a rate, even short-term loans from commercial banks are not available to enterprises in the real sector of the economy.

It would seem that the Central Bank should have listened to the president's call and understood that it is necessary to radically reduce the benchmark rate. The day after Putin's speech at the Neglinka, there was a meeting of the Central Bank's Board of Directors, where it was decided to leave the key rate unchanged-7.5 percent. The Bank of Russia has its own logic, because it is “independent” from the state, and therefore from the President of the Russian Federation!

Even more outrageous was the “revelation” of Bank of Russia First Vice President Ksenia Yudaeva, made on December 17. She said, “If you want to maximize production this year, expect a recession next year, because you will be abused, inflation will start, problems will start, and you will fall into a recession. In principle, it is much more correct that long-term development has a smoother development.” I do not know where this lady taught: neither at Moscow State University at the Faculty of Economics, nor at the Russian School of Economics, nor at the Stockholm Institute for Economics in Transition (1998-99). Or perhaps at the Massachusetts Institute of Technology, where she was awarded the title of Doctor of Economics? She is considered the heir to the cause of the “great reformer” Egor Gaidar. Being in many government positions, Yudaeva everywhere conveyed the dogmas of the Western liberal economic school.

And remember: during the years of industrialization in the USSR, the rate of economic growth was unprecedented. According to the calculations of our Russian economists, during the period 1929-1955 (with the exception of four years of the Great Patriotic War) the average annual growth rate of the USSR's national income was 13.8 percent (A. Galushka, A. Niyazmetov, M. Okulov: Growth Crystal. To the Russian economic miracle - M.: “Our Tomorrow,” 2021, p.8). Note: At the same time, there was no inflation and no signs of “falling into recession.” However, in Stockholm and at MIT, Mrs. Vice President of the Bank of Russia was not informed.

Yudaeva's statement is not her private opinion. This is the position of the Bank of Russia. If we do not want to lose in the war with the West, we have to get our economic rear ends in order. And this work should start with the Bank of Russia.

Source

Translation by Costantino Ceoldo