The Russian Central Bank will soon have a new boss. Sergei Ignatyev, who has held the post for three terms (the allowed maximum), is leaving. He is leaving with no vivid memories left behind, which in itself is not bad. He could well remain in history as the father of a default or a banking collapse. Preconditions were ripe in 2005 and 2009, but they managed to ride out the storm.
From what I have seen personally, he is a deeply decent and intelligent person, an economics theorist of a very high level. Is such a set of qualities sufficient to be chairman of the Central Bank of Russia in the 21st century? I do not think it is.
If we look back at the early 1990s, we will recall that a system of four or five major banks, extremely Soviet-style banks, was replaced by more than 2,000 non-descript organisations licensed to conduct banking activities. Their work brought about unprecedented mess. Agronomists, medical doctors, art directors and even housewives turned bankers. True, some managed to establish institutions that were fully respectable for those times, even though in 1998 they were exchanged for an IMF loan, which later disappeared, when licenses were revoked from six system banks. Ten years later, the United States, the IMF’s principal donor, did the opposite when it bought out its system banks and insurance companies at the expense of the taxpayers. But it is one thing to give textbook advice and condition the provision of a new portion of the loan on it, and it is a totally different thing to let millions of people who have lost their savings into city streets in a country where weapons are freely sold to practically any adult.
The banking reform became a part of Boris Yeltsin’s reforms program, for some reason called Gaidar’s reforms. I think that they bear his name because their results still make their victims shiver. Had they been successful and socially bearable, they would have borne the name of the country’s first president. What those guys did boils down to an almost total impoverishment of the population and destruction of the economy, which pushed Russia back to the level of countries that we were actively and generously helping in the construction of a bright socialist future.
This characteristic is equally applicable to the state of affairs in the banking system of the early 1990s. And the fragmentation of a system of state banks into microns led to that subjects of the economy were deprived of the principal means of development – the banking credit – in volumes commensurable with the size of the economy. Twenty years later, we are observing the process of concentration of the banking capital, which to my utter regret but not surprise benefits the very same state banks. True, by their efficiency and macroeconomic usefulness, the current state banks lose when compared to their predecessors.
And now oversight over this entire busy business has been handed over to the newly fashioned Central Bank of the Russian Federation. After caricature chairmen like Zverev and Matyukhin, the country’s principal bank had for a while a deserving top manager in the person of Viktor Gerashchenko. But an independent and sarcastic professional was not to the liking of Czar Boris and was removed when the rouble rate fell on the exchange for one day. The following day, the rouble bounced back. Thus, it is possible that the black Tuesday did not happen accidentally. Tatyana Paramonova failed to charm State Duma deputies, who approve the candidacy of Central Bank chairperson, and the clan of systemic liberals, as they are now called, took the country’s principal bank under its control, ceding it in 1998 for two years to the same old Gerashchenko, who was asked to clean up the heritage of a liberal course of the government of young reformers.
In my opinion, today’s rulers of the country have a poor understanding of the significance and potential of an institution combining the emission and the oversight functions. How else can one explain the fact that all strategic sectors, companies and monopolies have long been controlled by people in epaulets and with stripes on uniform trousers or, as a minimum, with Leningrad residency registration, and in the Central Bank people who do not entirely fit in the current personnel policy of the Kremlin still worship sterilisation of the money supply and inflation targeting?
Largely, this is a personal desert of Alexei Kudrin, who, being “Vladimir Putin’s personal friend,” has for 10 years concentrated in his hands the management of state finances, the Central Bank, the Deposit Insurance Agency, diamond extraction and a three-letter bank, one of the most “efficient” state banks in the country. Such a conception would have been okay, had it benefited the state. The principal criterion of such efficiency may be only one indicator: an increase of real incomes of the population and a war on poverty. If we forget about the official subsistence minimum (5,700 roubles per month in 2010), only needed for beautiful domestic statistics, we will see that 50 per cent of the population still earn less than the real minimum of some 15,000 roubles per month. In reality, the country has increased the gap between the richest and the poorest (even in RusStat’s biased statistics, the Gini coefficient has grown by 6 per cent, while the richest 10 per cent have become 20 per cent richer that the poorest 10 per cent of the citizens). As for the efficiency of expenditures, for which Kremlin and Russian White House inhabitants have fought during all these years, it can best be illustrated by the example of state investments into the VTB bank. Over the past few years the state has invested into the capital of that group approximately 1 trillion roubles. In 2006-2010 VTB paid dividends to its shareholders in the amount of 27.5 billion roubles. The dividend yield thus was 0.55% per annum, which, obviously, is by orders of magnitude below the inflation. Let us put it in perspective: one trillion roubles today is enough to buy control of at least two top-10 European banks.
Thus, engaged in confused monetary control and inflation countering, the Central Bank, thanks to efforts of systemic liberals, is out of sight for both the public opinion and clans inside the elite that are fighting for resources and spheres of influence. Now it is their (the systemic liberals’) last base and area of influence. To become unattractive for infighting in the Establishment, the Central Bank was deprived of and kept silent about a role in the country’s possible modernisation (not to be confused with lawyer D. Medvedev’s modernisation). And all exertions in the fight for a low inflation would result in nothing, as practically all experts with blinkers off recognise that the principal cause of inflation is not of monetary nature but is conditioned by a high degree of monopolisation of the economy and excessive state presence as well as the “corruption tax on businesses,” measured in trillions of roubles annually.
Yet, the Central Bank’s potential in modernisation is practically unlimited – it is the emission centre after all. Crisis phenomena in Europe and the United States give us object lessons of how and by what measures Central Banks take part in sorting out a credit squeeze and demand stimulation. And they do it without shouting about the impossibility to expand money supply, macroeconomic stability, etc., because if such measures are not taken, a collapse and a global-scale crisis would follow. The United States was more successful than anyone else and was the first to give signs of recovery in economic growth, probably because U.S. laws expressly provide for the Federal Reserve responsibility for the state of the national economy. In our country, by contrast, the Central Bank is in a mild form responsible for the stability of the national currency. But who needs a strong rouble in a dead economy? Therefore, State Duma elected officials would be well advised to turn their eye to this gap in the law on the Central Bank instead of asking for trouble and remaining in history under the nickname of State Dura [Fool].
Surprisingly as it may seem, but the Central Bank is not responsible for the state of the banking system either, the banking system over which it exercises oversight. The oversight force of this institution is some 4,200 strong – and no responsibility at all. Then what are they needed for? Let us take for example the Bank of Moscow, which I know not by hearsay. The Central Bank had been overseeing us for 15 years, audits would be conducted several times per year, beginning from 2008, it appointed observers to monitor our activities, and what good was all that? In the 16th year “efficient managers” came and in the blink of an eye discovered a black hole the size of their dream of a comfortable old age and a pension fund for a young man (see Vedomosti, 21 November 2011: Yusufov Had a Mandate from Medvedev). And the Central Bank stands aloof. Either it has missed it or does not want to quarrel with VTB and believes everything the raiders write to them. A good loan is called bad; money is repaid and they do not notice it – that is how former shareholders and managers imitate loan repayment while in reality the situation deteriorates by the day. This way in a year or two they will ask for more money. So the people need to be helped out, or the Vastly Treacherous Bank will collapse. Now the chief overseer has moved from the Central Bank to VTB as an independent director. Marvellous are thy works. And if Central Bank observers were responsible, they would now either expose VTB and say that it requested state assistance groundlessly and misled the country’s leadership or together with us talk to the investigators for having failed to see the wrongdoings. I think the picture would have been less rosy for the efficient bankers.
According to Bloomberg, the three main candidates for the role of a new top manager of the Central Bank are Messrs. Kudrin, Ulyukayev and Zadornov. All three are outstanding representatives of a wing in the 1997-2013 financial block that is clearly satisfied with the current state of affairs and the position of the Central Bank in the government. Therefore, in my view it makes no difference which one of the three gentlemen heads the Central Bank. Each one has in his past numerous stories that could form the basis of exciting novels about the disappearance of huge amounts of money. It would be very interesting to ask Mr Kudrin about his role in the system of illegal VAT refunds that prospered while he was finance minister, allocation of hundreds of billions of roubles to save non-system banks KIT-Finance, SvyazBank and GlobEx in 2008 and participation of the government-owned company Alrosa in non-specialised investment and purchase by Gokhran of Alrosa production with state budget money to save the latter from a default. A separate topic is contained in the question of how and what for did such a liberal make the actual nationalisation of the banking sector possible. If Mr Zadornov is appointed, we may have a default near at hand. He was finance minister in 1998 and knows what to do and how to do it. And the presence lately in the VTB system has for sure been a good practical “efficiency” school. They simply do not have any other managers there.
Like it or not, for simple people and businesses, including the private banking sector, nothing will change. Maybe only bank loans will still be expensive and state-owned banks will become just a little fatter. Although, it is not ruled out that protégés of other elite groups in the entourage of the incumbent president may push aside the liberals in the Central Bank. The struggle for the redistribution and control of dwindling resources promises surprises.
For the country, hopes for the better, not very promising as it is, are dwindling, because the Central Bank needs a thoughtful reform and transformation into the Main Bank of the Russian Federation, practicing economic growth and prosperity and functioning on the basis of the main principle of today’s economic realities: pragmatism.