13:56, 11 February 2013

"Sailboat without a rudder"

Putin's advisor Sergei Glazyev spoke about Russia's development plan

Sergey Glazyev Photo: Ruslan Shamukov / ITAR-TASS

At the end of January, it became known that RAS scientists would prepare a report for Russian President Vladimir Putin, outlining a list of measures necessary for the development of the country. From the side of the presidential administration, this work will be supervised by Putin’s adviser, academician Sergei Glazyev. Lenta.ru contacted the economist and asked him why such a document was needed and why the authorities did not listen to the 2020 Strategy recently finalized by scientists.

“Lenta.ru”: On January 18, information appeared in the media that scientists from the Russian Academy of Sciences would prepare a report for the president...

Yes, that's absolutely right.

And that the document will, let’s say, be different from the recently presented Strategy 2020 and will not always agree with the government’s position. The question is: are any “starting points” for this report already known? What will it be dedicated to and when should it appear?

I think it will appear in the spring. This document will be significantly different from everything that has been done so far because it focuses on specific issues. The Academy of Sciences has created a group of scientists who summarize the proposals available to the scientific community and prepare the final document. The purpose of this work is to answer the question of what measures should be taken to achieve the socio-economic development targets set by the president in his decrees of May 7 and in his election program.

Sergei Glazyev received his Doctor of Science degree back in 1990, and became a corresponding member of the Russian Academy of Sciences in 2000, eight years later receiving the title of academician. In addition to scientific activities, Glazyev worked in the executive branch (from 1992 to 1993 he was the Minister of Foreign Economic Relations of Russia), as well as in the field of education. In addition, he worked in the apparatus of the Federation Council and was a State Duma deputy from the Rodina bloc, being one of its founders. For a long time, Glazyev criticized the government’s economic policy, but during the 2011-2012 presidential campaign he became a confidant of Vladimir Putin, and then received the post of his adviser. At the same time, he himself noted that he disagrees with many of the government’s steps, but “does not see viable alternatives for Russia to electing Putin as the country’s president.” As an advisor, Sergei Glazyev is responsible for Eurasian integration. In addition, as a presidential representative on the National Banking Council, he deals with monetary policy issues.

Now our economy is gradually sliding towards an inertial development trajectory, and the impulses that were given to reach the necessary growth parameters and increase efficiency are not yet enough. The main task that we must solve is the creation of a system of measures necessary to accelerate economic development, for successful modernization and new industrialization of our economy.

The program will be of an applied nature and contain a comprehensive answer to the question of what needs to be done to achieve the goals, what problems exist, what threats, both external and internal, need to be taken into account and neutralized. In other words, this will not be a “program about everything”; it will only concern solving key problems and setting basic tasks.

Are some measures and threats already known? Or is it still under discussion?

We agreed at the working group not to present for public discussion those key ideas that are still being discussed. At the same time, it is obvious that we need to resolve the bottlenecks that have developed in the economic system. Thus, it is necessary to significantly increase the share of domestic sources of lending and investment, it is necessary to create a system for stimulating innovative activity, and protect our financial system from threats that could destabilize it from the outside.

The obvious point is the full-scale use of our scientific, production and financial and economic potential, which today is clearly “underutilized.” For example, our volume of savings is one and a half times greater than the volume of industrial investments. The flight of capital from the country is about one hundred billion dollars over the past year, which could be effectively used in modernizing the economy. At the same time, on the one hand, production facilities in knowledge-intensive industries are idle, and on the other hand, there remains a noticeable outflow of specialists leaving abroad with their innovative projects. In other words, we are using our resources with extremely low efficiency. All of the above, of course, is in the spotlight.

However, some of the report's provisions were leaked to the press. Thus, RAS scientists allegedly warned the president about a “financial war” on the part of developed countries. The point is that the latter issue excess amounts of currency, which allows them to gain cheap access to Russian real assets.

This is not a provision of the report, but one of the problems that we drew attention to. The Russian economy is now completely open and extremely vulnerable to external shocks. The risks arising from this are evidenced by the consequences of the acute phase of the global financial crisis for our country, during which our economy lost more than other G20 countries. We had the largest decline in the stock market, the largest decline in GDP and industrial production. Enormous damage was caused to the knowledge-intensive industry: mechanical engineering production fell by more than a third.

The concept of long-term socio-economic development of Russia, adopted in October 2008, provided for a number of indicators that the country was supposed to achieve by 2020. In particular, it was assumed that GDP per capita in terms of purchasing power in 12 years should reach 30 thousand US dollars compared to 13.9 thousand dollars in 2007. In other words, the income of the population should have been 70 percent of the level of developed countries, while in 2007 the ratio was only 40 percent.

The destabilization that occurred at the end of 2008 disrupted the trajectory of economic growth and prevented the implementation of the goals of the concept of long-term development of Russia, adopted by the government in October 2008. Today we are almost one and a half times behind in terms of development indicators from the targets that were outlined then. Naturally, an analysis is required as to why anti-crisis policy measures were not balanced and linked to the long-term development goals outlined by Vladimir Putin in October 2008.

It seems that it was the crisis that got in the way.

The most common explanation is “the crisis got in the way.” But I am convinced that if banks had provided the real sector of the economy with two trillion rubles aimed at supporting them, then our GDP growth rates today would be twice as high and we would already be on a sustainable development trajectory. But the bankers used this money mainly for monetary and financial speculation. For the macroeconomic system as a whole, the fiery money emission in order to save banks turned out to be destabilizing: after the injection of funds, the ruble exchange rate fell, and the confidence of citizens and entrepreneurs in the financial system was undermined. Instead of giving money to the real sector, banks threw it into the collapse of the ruble, earning hundreds of billions of rubles at the cost of a surge in inflation and impoverishment of the population, another wave of impoverishment of our depositors who trusted the state. We are still reaping the fruits of this unbalanced, incomplete decision on anti-crisis measures. Including in the form of capital export, although the needs for it within the country are great and investment opportunities are also significant.

At the same time, we see that the leading countries of the world, as one would expect, according to the applied applications of Kondratieff’s theory of long waves ( see inset ), respond to the structural crisis by a sharp expansion of the supply of money. This is done in order to help businesses master the latest technologies and quickly enter a new technological paradigm. Today, any European, American, Japanese, Chinese companies that have promising innovation and investment projects can easily take out a loan for three to five years at a negative interest rate in real terms. At the same time, our Central Bank continues to pursue conservative policies that are suitable for market equilibrium conditions, but do not provide the economy with the necessary amount of money to overcome the structural crisis. As a result, a business cannot obtain the required volume of credit resources to invest in development, sufficient to overcome the threshold of synchronous costs of establishing production facilities of a new technological order.

Long Kondratieff waves refer to periodic cycles of the modern world economy lasting 40-60 years. According to this theory, during the upward wave of each major cycle, the economic structure changes greatly, which often coincides with economic or political crises. Many researchers note that at this time there is a massive introduction of innovations into production and a change in technological structures.

Historical experience shows that to overcome structural crises associated with a change in technological structures, a powerful initiating impulse from the state is required. Thus, overcoming the previous crisis of the 70-80s of the last century was accompanied by a sharp increase in government funding for the development of information and communication technologies under the pretext of the arms race in space. The Strategic Defense Initiative launched by the United States gave a powerful impetus to its development - for more than two decades, the complex of information and communication technologies grew at a rate of about 20 percent per year, boosting the entire economy. Overcoming the structural crisis before last was accompanied by the catastrophe of World War II, which required the leading states to make gigantic efforts to master motorized technology.

The government has two levers to stimulate the rise in economic activity - the fiscal system and monetary policy. We currently use neither one nor the other. in our budget We have a budget rule , according to which a significant part of oil revenues, instead of being invested in economic development, is reserved. By all standards, we already have an excessive amount of foreign exchange reserves in the country, and their further increase does not add stability, but reduces the possibilities for economic development. Our fiscal system is holding back economic development, although right now we need huge investments in infrastructure modernization and the development of new technologies.

What about monetary policy?

The Central Bank's monetary policy limits economic activity. Over the past two decades, the Central Bank has withdrawn more money from the economy than it has given, sterilizing what it believes is an excess money supply. Thus, it slowed down economic growth, contrary to the very meaning of its existence as a lender of last resort. By issuing rubles solely to increase foreign exchange reserves and simultaneously withdrawing them from the domestic market by freezing oil and gas budget revenues, he blocked the development of domestically oriented sectors of the economy and served exporters of natural resources, thereby promoting resource specialization and deindustrialization of our economy. Although the Central Bank has recently switched its emission policy to refinancing commercial banks, this is being done more to maintain liquidity than to create conditions for long-term lending to economic growth. It turns out that, on the one hand, the leading countries of the world offer unlimited volumes of almost free loans, and our monetary authorities, on the contrary, limit the supply of money in the economy. Our business entities have a natural incentive to take money abroad. And everyone who can prove their solvency does so.

But if an enterprise takes money abroad, after some time it transfers its assets to offshore companies, because it is more convenient to take out loans and it is easier to arrange collateral there. As a result, such an enterprise leaves the national jurisdiction, its economic interests shift towards the export of capital. At the same time, such an enterprise becomes very vulnerable to external threats, becoming critically dependent on foreign creditors. We saw this during the crisis. Then our corporations, having taken out foreign loans, were unable to return them in a situation of margin calls, since their collateral mass decreased several times after the fall of the Russian stock market.

Vladimir Putin speaks at the general meeting of the Russian Academy of Sciences Photo: Yana Lapikova / RIA Novosti

If the prime minister had not instructed the monetary authorities to provide the necessary amount of credit resources to save our companies from inevitable bankruptcy, then today neither metallurgy nor a significant part of the chemical industry would remain in Russian ownership. Since the assets, or rather the ownership rights to them, were pledged to Western creditors, the demand for repayment of loans or increased collateral brought a number of our largest corporations to the brink of bankruptcy. If it were not for emergency assistance from the state, they would have already migrated to the creditors and we would have lost sovereign control over the basic sectors of the economy.

We live in an open economy and we have free movement of capital. As a result of the colossal money emission by the American Federal Reserve, the European, English and Japanese central banks, foreign creditors and investors have a colossal one-sided competitive advantage. It allows them, so to speak, to skim the cream off our economy, drawing the most solvent borrowers into their turnover. On this “circulation of capital” we lose from 35 to 55 billion dollars a year. The state gives our long-term money abroad cheaply, while our corporations attract short-term money at a high price. This unequal exchange creates conditions under which the absorption of traded Russian assets becomes just a matter of time.

This applies not only to Russia, but also to all other emerging markets. Some of them protect themselves by restricting the cross-border movement of capital in directions beneficial to them, and some do not, agreeing to colonization. The latter are losing the opportunity to develop independently, while the former are trying to use foreign investment to import the technologies they need. At the same time, without exception, all successful examples of modernization, all of what we call examples of the “economic miracle” - Korea, Japan, Southeast Asia, now China - built their success while maintaining sovereignty over their assets in basic and strategically important industries for development economy. They relied primarily on domestic sources of growth, attracting foreign investment in the areas they needed. If we maintain conditions under which foreign partners have a unilateral advantage in competition for the most profitable market niches and the most profitable assets in the economy, then we should not be surprised that they will ultimately determine our economic development. As a matter of fact, for many Russian industries this is already a fact.

For example?

For example, if we look at the ownership structure in our economy by sector, we see that the majority of non-state corporations in the chemical and metallurgical complex and the telecommunications sector have migrated to offshore companies. The main part of foreign trade campaigns is there. And the most profitable sectors of the food industry today, even their ultimate beneficiaries, have become foreign property - for example, the brewing or tobacco industries...

But cigarettes around the world are controlled by three major corporations: BAT, Philip Morris and Japan Tobacco.

More precisely, in most countries that have opened this industry for takeover by foreign corporations. This is an example of a commercial takeover. I remember examples of foreign takeover of our unique knowledge-intensive enterprises to destroy scientific and production potential. Thus, manufacturers of quartz glass for space needs, manufacturers of aircraft landing gear, manufacturers of strategically important electronic components, and carriers of unique design documentation were absorbed and completely destroyed. But this is no longer so much economics as politics, carried out by companies specially created for this purpose. Returning to big business, let me remind you once again that only emergency government assistance allowed national businessmen to maintain control over metallurgy and a significant part of the chemical industry during the crisis. In general, all sovereign countries do this; there is nothing unusual in the presentation of these problems and in the ways of solving them.

In general, capital outflow is most often associated with a poor investment climate, and the transfer of companies to offshore companies is associated with tax evasion or weak protection of property rights. Still, maybe it’s worth working in this direction?

Discussions on this topic have been going on for 20 years. There is no doubt that all this needs to be done: strengthen market institutions, the judicial system, and protect property rights. This is how we started the market reform in 1991, precisely with these words - and, like a mantra, they are repeated to this day. It is clear that this is not as simple a task as it once seemed. It could not be solved in the conditions of semi-criminal privatization, with the oligarchic-corruption symbiosis between big business and the state that arose after the 1993 coup d’etat. As for the poor business conditions: this is a mutual fault both on the part of the state bureaucracy and on the part of big business, which in symbiosis provided certain competitive advantages for some at the cost of deteriorating conditions for all others. The problem turned out to be long-term.

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It is clear that business development is threatened by corruption in control and regulatory bodies. But they also exist abroad, and in relation to offshore companies the threats are no less than ours. As an example, I can cite the confiscation of huge fortunes from various types of oligarchs from developing countries, which was repeatedly resorted to by the security forces and judicial authorities of the USA, Switzerland, and Great Britain. Under the pretext of illegality of income received, the assets of not only specific individuals, but also the ruling elites of entire countries, for example, in Latin America and Asia, were confiscated or frozen indefinitely. What is now happening on the part of the leading countries of the world in relation to offshore companies poses a very great threat to the accumulation of Russian nouveau riche in “tax havens”. Already now, according to the requirements of the Financial Stability Board, European, American and Japanese banks (and banks of all other leading countries too) must require clients who transfer money from offshore companies to disclose all information about beneficiaries. The next step is disclosing information about assets and their sources. The final step is to freeze assets until clients can prove that the money was acquired legally and taxes were paid.

The Western world has repeatedly gone through waves of confiscations of poorly protected money in the interests of the issuers of the relevant currencies and banks. But funds offshore are not protected in any way. I am sure that in today’s specific situation, the degree of protection of legally acquired property rights in our country is higher than in offshore companies, but, unfortunately, our nouveau riche do not fully understand this; they have developed a habit of hiding their dubiously received income from the state. It is not difficult to show that more than half of the capital outflow is an illegal withdrawal of funds associated with tax evasion through shell companies, fictitious foreign trade transactions, and so on. There is a complex of motives at work here, including tax evasion and fear of punishment for violations of the law. These motives matter more than a poor investment climate. We need mutual cooperation between the state and business: the first ensures transparency and security of property rights, and the second returns assets from offshore companies to the country.

Also, do not forget that Western monetary authorities are pumping the economy with cheap money and the problem of a “money overhang” arises, which can bring down both the dollar and the euro. One way to eliminate the overhang is to freeze all questionable money and remove it from the market. The “sword of Damocles” is already hanging over our offshore aristocracy, and the risk that it will fall is obvious. It would be a pity to lose money that could be used for the development of the country.

Let's return to monetary policy. Do you think that the Central Bank refinancing rate should be significantly reduced?

Yes. It should drop to at least four percent. In this case, conditions are created to reduce the market interest rate for borrowers to 6-7 percent, which corresponds to the average profitability in the manufacturing industry and construction. Naturally, debugging this system will require some training for banks, and setting up a banking control system, and possibly tightening foreign exchange controls. The latter should stop operations to destabilize the monetary and financial system that took place during the crisis. Then commercial banks, having received money from the Central Bank, not only brought it to the foreign exchange market, but even took it abroad, as we now know. All this can be avoided.

It is believed that a reduction in the Central Bank’s refinancing rate “accelerates” inflation, as it allows banks to borrow money more cheaply, which increases their quantity in the economy. In this regard, the Central Bank must keep the interest rate above inflation. This judgment is based on Fisher's formula , according to which the price level directly depends on the amount of money in the economy. However, opponents of high interest rates point out that the Fisher formula is not always confirmed empirically, and the final price of a loan for companies and households still most often turns out to be higher than the inflation rate. In addition, there are many examples in the world where central banks keep the refinancing rate below inflation - for example, the European Central Bank and the US Federal Reserve.

At the same time, we already need long-term loans to modernize infrastructure and new industrialization. But not all potential recipients of this long-term money have the necessary collateral and the ability to obtain a long-term loan. Here we need development institutions. The less developed the private banking sector is, the greater the burden falls on them. In principle, in all countries of the world the state banking sector operates as a large development institution. In Japan, for example, savings banks collect money, and the Development Bank of Japan invests it. We don't have anything like that. Our largest state-owned banks operate like ordinary commercial banks, making super profits.

Perhaps, at the same time, it is necessary to sell state-owned banks and reduce the public sector, as provided for in the government’s privatization program?

They need to be focused on solving those problems that private banks are unable to solve. And private traders need to be given the opportunity to develop in areas available to them - for example, in lending to trade, small and medium-sized businesses. For example, trade financing is extremely cost-effective and beneficial for banks. Now a large number of small and medium-sized banks have been forced out of the economy, because large state-owned banks have begun to develop these profitable market niches, although the state today must solve the problems of increasing economic and investment activity in the knowledge-intensive industry, which are beyond the capabilities of private banks. State banks can be used to solve problems that require large credit resources and significant control over their use. So far, our banking system is very weak, and all the total assets of commercial banks in the Russian Federation are less than one of any large American or Japanese bank. State banks will bear the main burden of organizing long-term lending for modernization and new industrialization of our economy.

In fact, today we have no other source for long-term investments other than state development institutions. But our state development institutions are tied to the budget, which has only one reserve - the reserve fund. The transformation of the reserve fund into the development budget is also one of the promising areas for increasing investment activity. But besides this, from my point of view, development institutions should also have access to refinancing from the Central Bank - approximately according to the same scheme as other commercial banks. But along with the obligations of manufacturing enterprises, state guarantees, guarantees from government program management bodies, and other government instruments for sharing risks can be used here.

Can you give examples of these development institutions? Do you mean something else besides VEB?

We have the entire “gentleman’s set”: VEB, Rosselkhozbank, insurance agency for export-import operations, investment fund, venture company, corporation for housing and communal reform... We have a set of these development institutions, but their capacity today is one hundred times less necessary.

Last question: at the end of 2012, the updated Strategy 2020 was presented , which was developed by dozens of experts under the leadership of the rectors of the Higher School of Economics and the Academy of Civil Service Yaroslav Kuzminov and Vladimir Mau. So far, practically nothing has been implemented. Why should the Kremlin listen now?

You see, if you hire the best engineers in the world, but the general designer does not have the necessary professional education and does not even know the basics of aerodynamics, then the airliner you ordered will not fly. Strategy 2020 cannot be perceived as an integral system: it is a large number of diverse expert recommendations that are not united by a system-wide logic and goal setting. The latter is replaced by reliance on market self-organization. It's like building an expensive ship without a control system or a sailboat without a rudder. Which, as you know, no tailwind will help.

The Academy of Sciences has always been distinguished by a systematic approach: the ability to see the main thing, identify problems, set tasks and find ways to solve them, and not just throw together a huge number of recommendations in the hope that “the market will regulate everything itself.” Even for the most correct recommendations to work, they must be linked into a logical system, and goals and objectives must be set for this system. It is precisely this goal-oriented systematic approach that underlies our work.

Kirill Sugrobov

"Sailboat without a rudder"

Putin's advisor Sergei Glazyev spoke about Russia's development plan

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