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The great debate on Russia’s economic policy

Comments by Central Bank Chair Elvira Nabiullina confirm Russia will maintain tight monetary policy as it seeks to rein in inflation and to move from an economic model based on consumption towards one focused on investment, manufacturing and export.

Alexander Mercouris

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With annualised inflation in Russia falling to 6.9% at the end of August, and with Russia reporting zero inflation in the first weeks of September, the strong indications are that the Russian Central Bank is preparing to cut interest rates by 0.5% to 10% at its next meeting on Friday 16th September 2016.

The Central Bank has indicated that it intends for the time being to keep its key rate 3% above the annualised rate of inflation.  Since the annualised rate of inflation is now roughly 7%, following the logic of the Central Bank’s own policy that should mean a cut in interest rates on Friday to 10%

Central Bank Chair Nabiullina calls interest rates of 10% against an annualised inflation rate of inflation of 6.9% and an underlying rate of inflation which may be as low as 5.5% a “moderately tight monetary policy”. 

In reality this “moderately tight monetary policy” is leaving Russia with by far the highest real interest rates of any major economy in the world.  To be clear, such a “moderately tight monetary policy” were it attempted in any Western economy or in China, would cause an extremely severe recession, one far more severe than the one Russia has just been through.  

The reason Russia has managed to avoid such a severe recession is not because the high real interest rates are not for real.  It is because its debt levels are so much lower than in the West and in China that it can live with interest rates they would find unendurable.  As it is these very high real interest rates are depressing economic growth, which is why the Central Bank, in the absence of any softening of policy, forecasts that growth in the medium term will remain low.

Nabiullina on Friday at an economic conference in Sochi provided an explanation for her policy. She made it clear that she has no intention of softening her policy. Rather she intends to keep interest rates 3% above inflation for the indefinite future in order to purge the Russian economy of its long running inflation problem, one which extends back to the 1960s (though it was masked during the Soviet period by the Soviet practice of fixing prices), and which caused Russia to experience double-digit inflation continuously throughout the 1990s and 2000s, with a sustained fall in inflation to single figures only taking place since roughly 2010.

Nabiullina has made it clear that this is all part of a long term policy of moving the Russian economy away from a model based on consumption towards one centred on investment and manufacturing.   The Central Bank explained its thinking back in November 2015 in the Guidelines it published to explain its monetary policy

“Interest rates on long-term contracts always imply inflation expectations. The Bank of Russia proceeds from the fact that as the inflation and inflation expectations decline, long term rates on loans will go down boosting the economic growth. Amid low inflation expectations long-term rates will persistently develop at the low level. It is an important advantage of the inflation targeting, under which the Bank of Russia implements the monetary policy.”

In the same Guidelines the Central Bank also made clear that it sees low inflation as the means of achieving long-term stability for the rouble

“……ensuring the stability of the national currency does not mean fixing its exchange rate against other currencies at a specific level, but rather achieving stability by maintaining the purchasing power of the ruble, i.e. by ensuring price stability.”

This is a policy framework which would be immediately familiar to the Bundesbank, from whom it appears to have been copied.  The idea is that the combination of low inflation, low long term rates of interest, and positive real interest rates, will encourage long term saving and investment, increasing over time productivity and growth. 

Until that comes the Central Bank is prepared to accept a trade-off of lower growth because of the tight monetary policy to reduce inflation in the short term.  This is the policy framework that I heard Kudrin and Nabiullina discuss at SPIEF. 

A further aspect of the policy is that in order to increase competitiveness and hold down imports the current policy also seeks to bear down on consumption by keeping the budget out of deficit.  Russia in fact already runs a very tight budget, with the country’s federal budget deficit as it exits recession no more than 2.9% of GDP in the first 8 months of the year – a fact which points to a budget surplus once the economy achieves sustained growth.

Somewhat to my surprise Kudrin justified the policy of keeping the budget out of deficit by conjuring up the so-called “crowding out” hypothesis whereby the need to fund the budget deficit supposedly “crowds out” funding for private investment.  

 It would be more true to say that keeping the budget balanced or in surplus tends to limit consumption and that this can result over time in trade and balance of payments’ surpluses.  Again that is the policy followed in Germany and is the reason for the very large  trade and balance of payments surpluses there.  Once again it seems that Kudrin and Nabiullina want to copy it.  

In other words, by raising investment and limiting consumption they want to make Russia an exporter of finished goods rather than, or as well as, an exporter of commodities.

That incidentally point to an important fact about the current fall in real incomes in Russia which has happened since the start of the recession, and which is still underway, and which critics of the government speak so often about.  

As Kudrin and Nabiullina both know it is the product of super-tight monetary and fiscal policies they are both insisting on, and is moreover an intended consequence of those policies.  In other words it is being deliberately engineered as part of a programme of moving the Russian economy away from an economic model based on consumption towards one based on investment, manufacturing and export.

 Again the parallels with Germany, which also squeezes real incomes in order to limit consumption and gain competitiveness, are very striking.  Given the implications this has for most Russians, it is no wonder that Kudrin and Nabiullina are unpopular.

All of this of course was accompanied both at SPIEF and in Nabiullina’s latest comments at Sochi by much talk of various incremental reforms to improve the business climate, which took up most of the time during the presentation at SPIEF which I attended.  

As Kudrin and Nabiullina of course both know, these reforms have actually been underway in Russia for some time, and have resulted in a sharp improvement in Russia’s World Bank Ease of Doing Business rankings

From time to time the reality of this improvement is questioned.  However there is no reason to think it is not taking place.  Anecdotal evidence on the contrary suggests it is. German Gref, a supporter of Kudrin and Nabiullina who is Sberbank’s CEO, recently told Putin that it actually is taking place, and as the CEO of Russia’s biggest bank he is arguably in the best position to know. In a meeting on 4th August 2016 to discuss the support Sberbank is providing to small businesses, he said the following

“As far as small businesses go, there are two aspects here. First, they need rapid and high quality lending. Second, there is everything related to assisting small businesses to resolve all the remaining problems such as convenient practice for keeping accounts, banking accounting and so on.

We have made great progress in this area and, starting in September this year, a new law will come into effect making it possible to open accounts, make transfers, register changes to company charters and so on online.

Essentially, small businesses will not have to visit state agencies in person anymore. This programme, which we are implementing together with the tax service, is a big step forward in general.

I think that the environment that we will have in place by the end of 2016, when all of the legal amendments take effect, will mean that Russia will be offering one of the most interesting and technologically convenient environments for small businesses.”

(bold italics added)

To those who assume that Kudrin and Nabiullina are free market fundamentalists, I would say that the word “market” was barely mentioned during their entire SPIEF presentation, just as it barely appears in the Central Bank’s Guidelines document. 

On the contrary – and as I have heard Kudrin say before – Kudrin seems to favour elements of industrial planning, as well as state involvement in developing infrastructure, even as he criticises excessive government interference in private business activity.  I doubt there is any Russian official who believes – as do some people in the US and in Britain – that the market is infallible and can be left alone to take care of itself.

Like it or not this is Russia’s economic policy.  I know that some people don’t like it.  I also know that there is an alternative plan being proposed by the Stolypin Group which takes an altogether more Keynesian approach by seeking to expand the economy through higher deficit spending. Whilst this alternative plan seems to have some supporters in the Economics Ministry, and though Putin has agreed to look at it, it was absolutely clear to me at SPIEF that it is the current policy that Putin favours and which has his backing, and which has the overall support of the government.

I don’t expect it to change and Nabiullina’s comments on Friday all but confirm as much.

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It’s Official: ‘Britain’s Democracy Now At Risk’

It’s not just campaigners saying it any more: democracy is officially at risk, according to parliament’s own digital, culture, media and sport committee.

The Duran

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Via True Publica, authored by Jessica Garland – Electoral Reform Society:


Britain’s main campaign rules were drawn up in the late 1990s, before social media and online campaigning really existed. This has left the door wide open to disinformation, dodgy donations and foreign interference in elections.

There is a real need to close the loopholes when it comes to the online Wild West.

Yet in this year’s elections, it was legitimate voters who were asked to identify themselves, not those funnelling millions into political campaigns through trusts, or those spreading fake news.

The government trialled mandatory voter ID in five council areas in May. In these five pilot areas alone about 350 people were turned away from polling stations for not having their papers with them — and they didn’t return. In other words, they were denied their vote.

Yet last year, out of more than 45 million votes cast across the country, there were just 28 allegations of personation (pretending to be someone else at the polling station), the type of fraud voter ID is meant to tackle.

Despite the loss of 350 votes, the pilots were branded a success by the government. Yet the 28 allegations of fraud (and just one conviction) are considered such a dire threat that the government is willing to risk disenfranchising many more legitimate voters to try to address it. The numbers simply don’t add up.

Indeed, the fact-checking website FullFact noted that in the Gosport pilot, 0.4 per cent of voters did not vote because of ID issues. That’s a greater percentage than the winning margin in at least 14 constituencies in the last election. Putting up barriers to democratic engagement can have a big impact. In fact, it can swing an election.

In the run-up to the pilots, the Electoral Reform Society and other campaigners warned that the policy risked disenfranchising the most marginalised groups in society.

The Windrush scandal highlights exactly the sort of problems that introducing stricter forms of identity could cause: millions of people lack the required documentation. It’s one of the reasons why organisations such as the Runnymede Trust are concerned about these plans.

The Electoral Commission has now published a report on the ID trials, which concludes that “there is not yet enough evidence to fully address concerns” on this front.

The small number of pilots, and a lack of diversity, meant that sample sizes were too small to conclude anything about how the scheme would affect various demographic groups. Nor can the pilots tell us about the likely impact of voter ID in a general election, where the strain on polling staff would be far greater and a much broader cross-section of electors turns out to vote.

The Electoral Reform Society, alongside 22 organisations, campaigners and academics, has now called on the constitution minister to halt moves to impose this policy. The signatories span a huge cross-section of society, including representatives of groups that could be disproportionately impacted by voter ID, from Age UK to Liberty and from the British Youth Council to the Salvation Army and the LGBT Foundation.

Voters know what our democratic priorities should be: ensuring that elections are free from the influence of big donors. Having a secure electoral register. Providing balanced media coverage. Transparency online.

We may be little wiser as a result of the government’s voter ID trials. Yet we do know where the real dangers lie in our politics.

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Corrupt Robert Mueller’s despicable Paul Manafort trial nears end (Video)

The Duran – News in Review – Episode 79.

Alex Christoforou

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Paul Manafort’s legal team rested its case on Tuesday without calling a single witness. This sets the stage for closing arguments before the judge hands the case to jurors for a verdict.

Manafort’s defense opted to call no witnesses, choosing instead to rely on the team’s cross-examination of government witnesses including a very devious Rick Gates, Manafort’s longtime deputy, and several accountants, bookkeepers and bankers who had financial dealings with Manafort.

Closing arguments are expected on Wednesday. Jurors may begin deliberating shortly after receiving their final instructions from judge Ellis.

Manafort case has nothing to do with Mueller’s ‘Trump-Russia collusion witch-hunt’ as the former DC lobbyist is accused of defrauding banks to secure loans and hiding overseas bank accounts and income from U.S. tax authorities.

U.S. District Judge T.S. Ellis III denied a defense motion to acquit Manafort on the charges because prosecutors hadn’t proved their case.

The Duran’s Alex Christoforou and Editor-in-Chief Alexander Mercouris discuss the circus trial of Trump’s former Campaign Manager Paul Manafort, and how crooked cop Robert Mueller is using all his power to lean on Manafort, so as to conjure up something illegal against US President Donald Trump.

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Via Zerohedge

Prosecutors allege he dodged taxes on millions of dollars made from his work for a Ukrainian political party, then lied to obtain bank loans when cash stopped flowing from the project.

The courtroom was sealed for around two hours Tuesday morning for an unknown reason, reopening around 11:30 a.m. with Manafort arriving around 10 minutes later.

The decision to rest their case without calling any witnesses follows a denial by Judge T.S. Ellis III to acquit Manafort after his lawyers tried to argue that the special counsel had failed to prove its case at the federal trial.

The court session began at approximately 11:45 a.m.:

“Good afternoon,” began defense attorney Richard Westling, who corrected himself and said, “Good morning.”

“I’m as surprised as you are,” Judge Ellis responded.

Ellis then heard brief argument from both sides on the defense’s motion for acquittal, focusing primarily on four counts related to Federal Savings Bank.

Federal Savings Bank was aware of the status of Paul Manafort’s finances,” Westling argued. “They came to the loans with an intent of doing business with Mr. Manafort.”

Prosecutor Uzo Asonye fired back, saying that that even if bank chairman Steve Calk overlooked Manafort’s financial woes, it would still be a crime to submit fraudulent documents to obtain the loans.

“Steve Calk is not the bank,” Asonye argued, adding that while Caulk may have “had a different motive” — a job with the Trump administration — “I’m not really sure there’s evidence he knew the documents were false.”

Ellis sided with prosecutors.

The defense makes a significant argument about materiality, but in the end, I think materiality is an issue for the jury,” he said, adding. “That is true for all the other counts… those are all jury issues.”

Once that exchange was over, Manafort’s team was afforded the opportunity to present their case, to which lead attorney Kevin Downing replied “The defense rests.

Ellis then began to question Manafort to ensure he was aware of the ramifications of that decision, to which the former Trump aide confirmed that he did not wish to take the witness stand.

Manafort, in a dark suit and white shirt, stood at the lectern from which his attorneys have questioned witnesses, staring up at the judge. Ellis told Manafort he had a right to testify, though if he chose not to, the judge would tell jurors to draw no inference from that. – WaPo

Ellis asked Manafort four questions – his amplified voice booming through the courtroom:

Had Manafort discussed the decision with his attorney?

“I have, your honor,” Manafort responded, his voice clear.

Was he satisfied with their advice?

“I am, your honor,” Manafort replied.

Had he decided whether he would testify?

“I have decided,” Manafort said.

“Do you wish to testify?” Ellis finally asked.

“No, sir,” Manafort responded.

And with that, Manafort returned to his seat.

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One more step toward COMPLETE de-dollarization

Over the past several months, sitting here in Moscow, it has become increasingly obvious that while the US Dollar is unquestionably the world’s leading and liquid reserve currency, it comes with an ever increasing high price (of sovereignty and FX) if you are not the USA.

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I have opined and written about the trend towards de-dollarization before, but with the latest US –Turkish spat it has hit the wallets, mattresses and markets of a number of countries, be they aligned with Washington or not. One thing they all have in common was that in this recent era of low cost available money, many happily fed at the US dollar trough.

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This serves as a further albeit loud example to many nations for the need to diversify to an extent away from the greenback, or risk being caught up in its volatile, sudden and unpredictably risky increasingly politicized directions.

The Dollar and the geopolitical winds from Washington are today as never before openly being used as policy, which can be called the “carrot and stick”, a distinctly Pavlovian approach. Sadly, few if any can make out where or what the carrot is in this recent US worldview branding.

Tariffs, sanctions, pressured exchange rates, the Federal Reserve loosening or tightening, trade agreements and laws ignored or simply trashed… there is a lot going on which seems to democratically affect America’s allies as well as those on Washington’s politically popular and dramatic “poo-poo” list.

Just now from a press conference in Turkey, I watched Russia’s foreign minister Lavrov say that through the actions shown by the US, the role of the US dollar as a secure global reserve currency for free trade will diminish as more countries switch to national currencies for international trade.

He clearly spoke for many nations when he said; “It will make more and more countries that are not even affected by US sanctions go away from the dollar and rely on more reliable, contractual partners in terms of currency use.” Putting the situation in a nutshell he went on to say “I have already said this about sanctions: they are illegal, they undermine all principles of global trade and principles approved by UN decisions, under which unilateral measures of economic duress are unlawful.”

Turkey, a long-standing NATO ally and a key line of western defense during the long cold war years fully agreed with his Russian counterpart. The Turkish foreign minister Mr. Cavosoglu openly warned that US sanctions or trade embargoes can and are being unilaterally imposed against any country at any time if they do not toe DC’s political line.

He said at the same press conference; “Today, sanctions are imposed on Turkey, and tomorrow they can be used against any other European state. If the United States wants to maintain respect in the international arena, then it is necessary for it to be respectful of the interests of other countries.”

What is happening in Turkey is symptomatic of the developed and emerging markets globally. When trillions of dollars of newly issued lucre was up for grabs, thanks to several developed country central banks, it was comparatively easy for governments and companies just like Turkey’s to borrow funds denominated in dollars and not their national currencies.

Turkey has relied on foreign-currency debt more than most EM’s. Corporate, financial and other debt denominated mostly in dollars, approximates close to 70% of it’s economy. Therefore as the Turkish lira plunges, it is very costly for those companies to repay their dollar-denominated loans, and even now it is patently clear many will not.

The concern rattling around the underbelly of the global markets is what can be reasonably expected for assets and economies that were inflated by cheap debt, the United States included. All this points not so much to a banking crisis as has happened eight years ago, but a systemic financial market crisis.

This is a new one, and I doubt if any QE, QT, NIRPs, or ZIRPs will make much of a difference, despite the rocket-high equity markets the US has been displaying.

One financial trader I spoke to, whom I have known since the early 1980’s (and I thought him ancient then) muttered to me “we’re gettin’ into the ecstasy stage, nothing but the high matters, everything else including the VIX is seen as boring denial, and not the warning tool it is. Better start loading up on gold.”

Meanwhile, de-dollarization is ongoing in Russia and is carefully studied by a host of countries, especially as the Russian government has not yet finished selling off US debt; it still has just a few billion to go. The Russian Finance Minister A. Siluanov said this past Sunday that Russia would continue decreasing holdings of Treasuries in response to sanctions.

The finance minister went on to say that, Russia is also considering distancing itself from using the US dollar for international trade, calling it an unreliable, conditional and hence risky tool for payments.

Between March and May this year, Russia’s US debt holdings were sold down by $81 billion, which is 84% of its total US debt holdings, and while I don’t know the current figure it is certain to be even less.

The latest round of tightening sanctions screws against Russia were imposed by the State Department under a chemical and biological warfare law and should be going into effect on August 22. This in spite of the fact that no proof was ever shown, not under any established national or international law, or with any of several global biochemical conventions, not even in the ever entertaining court of public opinion.

Whatever Russia may continue to do in its relationship with US debt or the dollar, the fact of the matter is that Russia is not a heavyweight in this particular financial arena, and the direct effects of Russia’s responses are negligible. However, the indirect effects are huge as they reflect what many countries (allied or unallied with the US) see as Washington’s overbearing and more than slightly unipolar trade and geopolitical advantage quests, be they Mexico, Canada, the EU, or anyone else on any hemisphere of this globe.

Some of the potential indirect effects over time may be a similar sell-off or even gradual reduction of US debt exposure from China or any one of several dozens of countries deciding to reduce their exposure to US debt by reducing their purchases and waiting for existing Treasuries to mature. In either case, the trend is there and is not going away anytime soon.

When Russia clears its books of US dollarized debt, then who will be next in actively diversifying their US debt risk? Then what might be the fate of the US Dollar, and what value then will be the international infusions to finance America’s continually growing debt, or fuel the funds needed for further market growth? Value and the energy of money has no politics, it ultimately trends towards areas where there is a secure business dynamic. That being said, looks like we are now and will be living through the most interesting of disruptive times.

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