Translated material
Battle for the ruble
The Vremya publishing house is preparing for publication the book “The Default that Could Not Happen” and the second edition of “The Battle for the Ruble.” Today we offer readers of Vremya Novostei Sergei Aleksashenko’s view on the lessons of the August crisis and a fragment from Martin Gilman’s book dedicated to the most tense period of 1998, when receiving a “big” aid package from the IMF, the World Bank and some G7 countries did not help save Russia from investor flight, default and devaluation.
Ten whole years have passed. Many times over the years I have had to answer the question: could everything have gone differently, could other decisions have been made? And every time the events of August 1998 rose so clearly in my memory, as if all this had happened quite recently.
The crisis of 1998 became the most difficult test for Russia, for its economy, for its citizens. The price paid for the mistakes and indecisiveness of the authorities was enormous. The pain from the losses suffered still cannot calm down for hundreds of thousands of people. It is no coincidence that the first question that is still asked at the slightest sign of financial instability is: “Won’t there be a new default?”
10 years is, of course, a reason to talk about the lessons and conclusions of August 1998.
The most important thing for me as a member of the “crisis team” was that almost all of our forecasts regarding the consequences of the decisions made were justified. And this became evidence of the correctness of our decisions, prepared and made at that moment in an extremely limited time frame. The refusal of the Ministry of Finance to fulfill its obligations to service and repay the public debt, the multiple devaluation of the ruble and the subsequent surge in inflation certainly dealt a serious blow to both the population and Russian companies. At the same time, already in October 1998, after a sharp jump to the level of 20 rubles, the dollar exchange rate “calmed down” around 12 rubles, and if the monetary policy of late 1998 - early 1999 had been stricter, it is likely that this would have happened and enough to restore balance in the foreign exchange market. Already in December, many sectors of Russian industry, which unsuccessfully tried to compete with imports in the first half of 1998, showed double-digit growth rates, and since the beginning of 1999 this growth has become almost universal. The automotive industry recovered especially quickly, primarily AvtoVAZ, which in May 1998 reduced production volumes by more than a quarter. Subsequently, taking advantage of the protective properties of the low ruble exchange rate, Russian companies were able to dramatically expand their business; many were able to start from scratch and achieve tangible results in a very short time.
Subsequent events in Russia (and in recent months in developed countries) confirmed the correctness of the decisions taken by the Central Bank at the height of the crisis to save depositors’ funds placed in the largest banks that had actually gone bankrupt. In this regard, I would like to pay tribute to Andrey Kozlov, who proposed and implemented the solution to transfer deposits to Sberbank. To be honest, when I first heard this proposal from him, I didn’t really like it. It seemed to me that it was too early (and it was the very end of August) to take such drastic measures, that the banks had the resources and the desire to get out of this situation. But the more we discussed this idea, the more obvious it became to me that Andrey was right - the banks may have had the resources, but they certainly didn’t have the desire to save depositors. This decision, to a certain extent, made it possible to reduce the intensity of the banking crisis (although it was the banking system that was the most affected ten years ago), but, most importantly, it became a good lesson for the supervisory unit of the Bank of Russia.
Banking crises in different countries of the world clearly demonstrate that overcoming them is impossible without some degree of government involvement - be it Russia and Korea or the USA and Great Britain. And the faster the state develops and makes decisions, the less painful the consequences of crisis situations are. Taught by the experience of Inkombank and SBS, in 2004 the Russian authorities almost instantly made the necessary decision on GUTA Bank. It is noteworthy that it turned out to be “painfully” similar to the decision made by the US Federal Reserve regarding the Bear Stearns bank in the spring of 2008. And, as if for contrast, at the same time history allowed us to observe the many months of torment of the English regulators with the Northern Rock bank, which ended with the nationalization of the bank, and the intermediate costs of maintaining its business turned out to be many times higher.
Have Russian banks learned the necessary experience from the crisis of ten years ago? It's hard to say. “There are no others, and those are far away...”. Many of the actors who seemed to be the mainstays and titans of the banking sector could not bear the blows they received and withdrew from the scene. New players have arrived. So, are they destined to repeat the mistakes others have already made more than once?..
I am watching with alarm how the external debt of the Russian banking and corporate sector is growing at an incredible speed. The short-term motivation is absolutely clear - external loans are much cheaper and longer-term, and against the backdrop of a strengthening ruble, they are difficult to refuse. But it is enough to recall the sad experience of Thailand and Korea in 1997, which were in exactly the same situation, and which were suddenly faced with the impossibility of obtaining new loans, to understand the riskiness of such motivation. Our banks and companies found themselves in the same situation in early autumn 2007 and in the first quarter of 2008. What worried me was not that the Central Bank immediately made decisions to support individual banks, but that the big state-controlled banks were at the head of those asking. This means that both bank management and the supervisory unit were unable to adequately assess the risks.
It is frightening that in this situation our leaders often talk about Russia being a “safe haven”, an “island of stability” in the modern world (the same phrases were heard in early 1998). In response to this, new and new tens of billions of dollars continue to flow into the Russian financial system, which, on the one hand, of course, solves the problem of lack of liquidity in the banking system, but, on the other hand, makes the Russian economy more and more fragile, because its stability is increasingly depends on investor sentiment, on what is happening today in the financial markets of other countries.
Looking back, we must pay tribute to the Primakov government, which, unexpectedly for many, pursued a very, very tough budget policy, trying to “live within its means.” Of course, one can say “who would lend him a loan?”, and this would have its own truth: the Russian government at that time could not borrow funds either on the domestic or foreign markets. But, on the other hand, the government did not put too much pressure on the Central Bank, receiving relatively little emission support from it. This policy made it possible to quickly extinguish the surge in inflation and maintain overall macroeconomic stability in the country.
It must be said that the crisis of 1998 formed several ideological paradigms in financial policy, both those that are difficult to argue with (about the dangers of inflating the budget deficit) and those that cannot be treated without irony (the default on GKOs/OFZs made it almost forbidden these tools in the eyes of many Russian politicians). The memory of the default helped the Ministry of Finance in the early 2000s to build the structure of the Stabilization Fund. At a time when oil prices had just begun to rise and had not even reached $30 a barrel, memories of the crisis were very fresh and few resisted the proposal to create a rainy day reserve.
However, life has not yet given us the opportunity to check how well the Russian authorities have learned the lessons of 1998 - the abrupt rise in prices for oil and other raw materials has led to the fact that all problems with tax collection, strict budget discipline, and control over the effectiveness of budget policy have faded into the background plan. The authorities have the opportunity to spend as much money as they consider necessary. Serious analysis of government budget proposals has become unthinkable in recent years. And even obvious mistakes, measured in tens of billions of rubles (as in the case of the monetization of benefits), could not force officials to listen to the position of their opponents.
The most sad consequence of the 1998 crisis, from my point of view, was the virtual destruction of the Central Bank as an independent institution in Russia. The Russian political elites, apparently, found it convenient to replace a real analysis of the causes of the crisis and the mistakes made with a simple and understandable solution for everyone - to “appoint” those responsible. The Bank of Russia was found guilty, and dozens of criminal cases were brought against its leaders for all sorts of reasons. For example, one of the accusations was based on the fact that a customs declaration for the import of $4 billion received from the IMF in the form of a loan was not found; in another case, it was planned to bring charges for the fact that the Central Bank switched to using bank cards when employees travel abroad to pay for tickets and hotels; finally, an attempt was made to bring charges for the signed instructions on the formation of a required reserve fund, which “led to a massive withdrawal of funds from banking institutions” - today all this looks funny, but in 1998-99. it was no laughing matter. The Central Bank was “made” guilty partly in order to try to prove someone’s malicious intent in everything that happened, partly so that the new heads of the Central Bank would take a more “flexible” position when discussing certain budget needs or the interests of government agencies. Today no one can say that the Bank of Russia has its own point of view, different from the position of the Ministry of Finance. But the price for this was the inability of the monetary authorities to achieve victory over inflation.
Thinking about the title of my book at that time, I wanted to say that a strong and stable national currency is an attribute and an indispensable condition for a strong and successful state. From an economic point of view, achieve the internal stability of the ruble, i.e. low inflation is no less, and perhaps more important, than external stability. In the end, if internal stability of the ruble is achieved, then its external stability and, possibly, transformation first into a regional and then into a global currency will inevitably happen. High inflation, which can no longer be hidden by statistical tricks, undermines the foundations of the economic system; its impact on the economy is akin to corrosive processes that are not visible for the time being, but the consequences of which can be catastrophic if these processes go too far. Unfortunately, this is precisely the lesson that the Russian authorities have not learned for themselves. Throughout the post-crisis period, many Russian financial officials said that there was no need to fight inflation, that it would gradually decline on its own, and that the economy would feel normal even with a double-digit rate of price growth. However, the events of the last year have shown that it is not for nothing that the standard of “normal” inflation around the world today is considered to be 3% - barely touching the 10% mark, Russian inflation began to accelerate and quickly moved towards the 15% level.
Related to the inflation theme is another lesson that, in my opinion, the Russian authorities have not learned: the events of ten years ago convinced me that under normal conditions the exchange rate is not an instrument, but the result of economic policy (by abnormal conditions I mean, for example, the conclusion economy from a state of hyperinflation). Any attempts by the authorities to manipulate the exchange rate in one direction or another will sooner or later lead to the emergence of serious imbalances in the economy, which can only be overcome at the cost of a crisis.
In this regard, the truly manic policy of strengthening the real exchange rate of the Russian ruble, pursued over the past six years, seems to me clearly erroneous. The “funny” thing is that this policy was presented as the only possible tool to combat inflation, although no one could explain the mechanisms of its operation. As a result, it was not possible to defeat inflation, but it was possible to launch the mechanism of “eating up” oil revenues, which was well known from Soviet times. And here again, the list of goods that are more profitable to import from abroad than to produce in the country is growing, and the list of exported products other than raw materials is steadily shrinking.
Fortunately for everyone, galloping oil prices make it possible to turn a blind eye to all these problems and even talk about “immunity from the Dutch disease,” but in the long term, Russia’s transformation into a country whose current well-being and future depend solely on the situation in world prices for raw materials is becoming increasingly more inevitable. But in order for the ruble to become truly convertible, and for Moscow to become an “international financial center,” which the Russian authorities so want, the economy must begin to produce something that would be in demand outside its borders and, preferably, that this something" was not exclusively raw material. This is precisely why the Russian economy needs low inflation, and this is why we have the right to demand that the Central Bank win this difficult battle for the ruble.