Russia's Central Bank Is Clueless

Either that, or it's engaged in deliberate sabotage, something many Russians already believe

Thu, Dec 11, 2014
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Mikhail Khazin is an extremely popular intellectual in Russia, who speaks mostly on economic and geopolitical matters.

His ideas are important because they influence thinking in Russia, and interesting because they are original.

They are far different from both the ideas that hold sway in the West, and the ideas the West imagines are attractive to Russians.

Our contributor The Saker was able to secure a long Q&A session with Khazin that was translated by a team of his volunteers.

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We are presenting exceprts from the discussion in a series of articles. This is the second installment. See the first one here.

This material originally appeared at The Vineyard of the Saker


There is a law that states that the Central Bank is independent of the government.

Theoretically, the Central Bank has the right to set its own monetary and money creation policy. However, there are two limitations.

The first is the IMF policy. Since the Russian Federation signed an agreement with this organization, the Central Bank sees itself as the main instrument for the implementation of the agreement.

Of course, it is largely determined by personalities - while the head of the Central Bank, Gerashchenko, was indeed a distinguished banker and statesman, the Central Bank's policy was relatively independent of external sources; with Ignatiev and Nabiullina the situation has changed and the latter leaders try not to argue with the IMF.

The second limitation is the National Banking Council, which includes several representatives from the President Office, government and Parliament. A longstanding Russian Finance Minister, Alexei Kudrin, who is not only a personal friend of President Putin but is also close to the IMF Russian expert, played a key role on the Council until recently.

Today, the situation is gradually beginning to change.

It is already clear that the old policy of the Central Bank (that reflects the vision of the IMF in its most orthodox form) does not produce the desired effect and there is a growing criticism in the country of the policy of the Central Bank and the government.

However, so far, the leadership of the Central Bank is withstanding this public criticism and does not intend to change its policy. At the same time, the government keeps pressure on the Central Bank to achieve specific results for itself.

In particular, the devaluation of the ruble in the last two months is largely due to the fact that the government has too optimistically promised economic growth, which is clearly not there.

An attempt was made to stimulate it with the Central Bank agreeing to go against its core mandate, which requires ensuring stability of the national currency’

The Central Bank’s investment policy is similarly pulled by the opposing forces of IMF rules and the country’s economic needs. During Gerashchenko’s tenure, the Central Bank was actively increasing domestic capital (from late 1998 until 2003, the money stock M2 increased approximately 10-fold relative to GDP, from 4% to 40%, and about 15 times in absolute terms).

The post-Gerashchenko Central Bank has been pursuing a strict policy of keeping the ruble from becoming an independent investment vehicle (in compliance with the principles of the Bretton Woods system, in which the dollar should be the only investment source).

It has become clear today that there won’t be foreign investment in Russia at a significant scale and therefore it is necessary to stimulate the ruble investment process.

However, the current leadership of the Central Bank refuses to take any steps in this direction. Thus there is a reason to believe that the management of the Central Bank will change in the medium term.

Financial Policy

I have a suspicion that the government and the Central Bank (and this refers to a united ideological, commercial and political ‘team’ which are labelled by the media as ‘Liberals’, although the term is potentially misleading), who promised the national political leadership economic growth although they were unable to maintain it, have decided to resolve the situation by devaluation.

However they simply don’t understand economics, rather they do not understand that devaluation will only benefit GDP in these specific cases:

  • Either there is a large amunt of idle capacity (like in 1998),
  • or there is a large amount of freely available credit.

At the moment there is neither.

Foreign exchange investments are not profitable and no one will invest.

As for the ruble the central bank has simply refused to open up the credit market. This means that there can be no positive consequences from devaluation only negative ones.

The most obvious will be a collapse in living standards amongst the normal population as the majority of consumer goods are imported.

This brings us to the hypothesis that the governance of the central bank is in cahoots with Washington with the shared aim of subverting Putin. The hypothesis is already mainstream in the Russian Media.

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