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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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Theresa May goes to Brussels and comes back with a big fat donut (Video)

The Duran Quick Take: Episode 39.

Alex Christoforou

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The Duran’s Alex Christoforou and Editor-in-Chief Alexander Mercouris take a quick look at Theresa May’s trip to Brussels to try and win some concessions from EU oligarchs, only to get completely rebuked and ridiculed, leaving EU headquarters with nothing but a four page document essentially telling the UK to get its act together or face a hard Brexit.

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Via Zerohedge


Any confidence boost that might have followed Theresa May’s triumph this week over her party’s implacable Brexiteers has probably already faded. Because if there was anything to be learned from the stunning rebuke delivered to the prime minister by EU leaders on Thursday, it’s that the prime minister is looking more stuck than ever.

This was evidenced by the frosty confrontation between the imperturbable May and her chief Continental antagonist, European Commission President Jean Claude Juncker, which was caught on film on Friday shortly before the close of a two-day European Council summit that descended into bitter recriminations. After offering token praise of May’s leadership, Brussels’ supreme bureaucrat criticized her negotiating strategy as “disorganized”, provoking a heated response from May.

Earlier, May desperately pleaded with her European colleagues – who had adamantly insisted that the text of the withdrawal agreement would not be altered – to grant her “legally binding assurances” May believes would make the Brexit plan palatable enough to win a slim victory in the Commons.

If there were any lingering doubts about the EU’s position, they were swiftly dispelled by a striking gesture of contempt for May: Demonstrating the Continent’s indifference to her plight, the final text of the summit’s conclusions was altered to remove a suggestion that the EU consider what further assurances can be offered to May, while leaving in a resolution to continue contingency planning for a no-deal Brexit.

Even the Irish, who in the recent past have been sympathetic to their neighbors’ plight (in part due to fears about a resurgence of insurrectionary violence should a hard border re-emerge between Northern Ireland and the Republic of Ireland), implied that there patience had reached its breaking point.

Here’s the FT:

But Leo Varadkar, the Irish premier, warned that the EU could not tolerate a treaty approval process where a country “comes back every couple of weeks following discussions with their parliament looking for something extra…you can’t operate international relations on this basis.”

Senior EU officials are resisting further negotiations — and suggestions of a special Brexit summit next month — because they see Britain’s requests as in effect a bid to rewrite the exit treaty.

Mr Varadkar noted that many prime ministers had been called to Brussels “at short notice” for a special Brexit summit “on a Sunday in November,” adding: “I don’t think they would be willing to come to Brussels again unless we really have to.”

In response, May threatened to hold a vote on the Brexit plan before Christmas, which would almost certainly result in its defeat, scrapping the fruits of more than a year of contentious negotiations.

Given that Mrs May aborted a Commons vote on her deal this week because she feared defeat by a “significant margin,” her comments amounted to a threat that she would let MPs kill the withdrawal agreement before Christmas.

Mrs May made the threat to German chancellor Angela Merkel, French president Emmanuel Macron and EU presidents Jean-Claude Juncker and Donald Tusk as the two day Brussels summit descended into acrimony, according to diplomats.

“At the point where there is no prospect of getting anything more from the EU, that’s when you would have to put the vote,” said one close aide to Mrs May.

If this week has taught May anything, it’s that her plan to pressure the EU into more concessions (her preferred option to help her pass the Brexit plan) was an unmitigated failure. And given that running out the clock and hoping that MPs come around at the last minute (when the options truly have been reduced to ‘deal’ or ‘no deal’) leaves too much room for market-rattling uncertainty, May is left with a few options, two of which were previously ‘off the table’ (though she has distanced herself from those positions in recent weeks).

They are: Calling a second referendum, delaying a Brexit vote, pivoting to a softer ‘Plan B’ Brexit, or accepting a ‘no deal’ Brexit. As the BBC reminds us, May is obliged by law to put her deal to a vote by Jan. 21, or go to Parliament with a Plan B.

If May does decide to run down the clock, she will have two last-minute options:

On the one hand she could somehow cancel, delay, soften or hold another referendum on Brexit and risk alienating the 17.4 million people who voted Leave.

But on the other hand, she could go for a so-called Hard Brexit (where few of the existing ties between the UK and the EU are retained) and risk causing untold damage to the UK’s economy and standing in the world for years to come.

Alternatively, May could accept the fact that convincing the Brexiteers is a lost cause, and try to rally support among Labour MPs for a ‘softer’ Brexit plan, one that would more countenance closer ties with the EU during the transition, and ultimately set the stage for a closer relationship that could see the UK remain part of the customs union and single market. Conservatives are also increasingly pushing for a ‘Plan B’ deal that would effectively set the terms for a Norway- or Canada-style trade deal (and this strategy isn’t without risk, as any deal accepted by Parliament would still require approval from the EU).

But as JP Morgan and Deutsche Bank anticipated last week, a second referendum (which supporters have nicknamed a “People’s Vote”) is becoming increasingly popular, even among MPs who supported the ‘Leave’ campaign, according to Bloomberg.

It’s not the only previously unthinkable idea that May has talked about this week. Fighting off a challenge to her leadership from pro-Brexit Conservative members of Parliament, the premier warned that deposing her would mean delaying Britain’s departure from the European Union. That’s not something she admitted was possible last month.

The argument for a second referendum advanced by one minister was simple: If nothing can get through Parliament — and it looks like nothing can — the question needs to go back to voters.

While campaigners for a second vote have mostly been those who want to reverse the result of the last one and keep Britain inside the EU, that’s not the reason a lot of new supporters are coming round to the idea.

One Cabinet minister said this week he wanted a second referendum on the table to make clear to Brexit supporters in the Conservative Party that the alternative to May’s deal is no Brexit at all.

Even former UKIP leader Nigel Farage is urging his supporters to be ready for a second referendum:

Speaking at rally in London, Press Association quoted Farage as saying: “My message folks tonight is as much as I don’t want a second referendum it would be wrong of us on a Leave Means Leave platform not to get ready, not to be prepared for a worst-case scenario.”

Putting pressure on Brexiteers is also the reason there’s more talk of delaying the U.K.’s departure. At the moment, many Brexit-backers are talking openly about running down the clock to March so they can get the hard Brexit they want. Extending the process — which is easier than many appreciate — takes that strategy off the table.

Labour leader Jeremy Corbyn has continued to call for May to put her deal to a vote principally because its defeat is a necessary precursor for another referendum (or a no-confidence vote pushed by an alliance between Labour, and some combination of rebel Tories, the SNP and the DUP).

“The last 24 hours have shown that Theresa May’s Brexit deal is dead in the water,” said Labour leader Jeremy Corbyn. “She’s failed to deliver any meaningful changes. Rather than ploughing ahead and recklessly running down the clock, she needs to put her deal to a vote next week so Parliament can take back control.”

The upshot is that the Brexit trainwreck, which has been stuck at an impasse for months, could finally see some meaningful movement in the coming weeks. Which means its a good time to bring back this handy chart illustrating the many different outcomes that could arise:

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Ukraine’s President Says “High” Threat Of Russian Invasion, Urges NATO Entry In Next 5 Years

Poroshenko is trying desperately to hold on to power, even if it means provoking Russia.

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Via Zerohedge


Perhaps still seeking to justify imposing martial law over broad swathes of his country, and attempting to keep international pressure and media focus on a narrative of “Russian aggression,” Ukrainian President Petro Poroshenko denounced what he called the high “threat of Russian invasion” during a press conference on Sunday, according to Bloomberg.

Though what some analysts expected would be a rapid flair up of tit-for-tat incidents following the late November Kerch Strait seizure of three Ukrainian vessels and their crew by the Russian Navy has gone somewhat quiet, with no further major incident to follow, Poroshenko has continued to signal to the West that Russia could invade at any moment.

“The lion’s share of Russian troops remain” along the Russian border with Ukraine, Poroshenko told journalists at a press conference in the capital, Kiev. “Unfortunately, less than 10 percent were withdrawn,” he said, and added: “As of now, the threat of Russian troops invading remains. We have to be ready for this, we won’t allow a repeat of 2014.”

Poroshenko, who declared martial law on Nov. 26, citing at the time possible imminent “full-scale war with Russia” and Russian tank and troop build-up, on Sunday noted that he will end martial law on Dec. 26 and the temporarily suspended presidential campaign will kick off should there be no Russian invasion. He also previously banned all Russian males ages 16-60 from entering Ukraine as part of implementation of 30 days of martial law over ten provinces, though it’s unclear if this policy will be rescinded.

During his remarks, the Ukrainian president said his country should push to join NATO and the EU within the next five years, per Bloomberg:

While declining to announce whether he will seek a second term in the office, Poroshenko said that Ukraine should achieve peace, overcome the consequences of its economic crisis and to meet criteria to join the EU and the North Atlantic Treaty Organization during next five years.

But concerning both his retaining power and his ongoing “threat exaggeration” — there’s even widespread domestic acknowledgement that the two are clearly linked.

According to The Globe and Mail:

While Mr. Poroshenko’s domestic rivals accuse him of exaggerating the threat in order to boost his own flagging political fortunes — polls suggest Mr. Poroshenko is on track to lose his job in a March election — military experts say there are reasons to take the Ukrainian president’s warning seriously.

As we observed previously, while European officials have urged both sides to exercise restraint, the incident shows just how easily Russia and the West could be drawn into a military conflict over Ukraine.

Certainly Poroshenko’s words appear designed to telegraph just such an outcome, which would keep him in power as a war-time president, hasten more and massive western military support and aid, and quicken his country’s entry into NATO — the latter which is already treating Ukraine as a de facto strategic outpost.

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The Stampede of the Gadarene Swine: US Leaders Allowing Ukraine to Pull Them into Global War

There is no way in any sane assessment that the Ukrainian forces – and certainly not the neo-Nazi militias recruited in the west of the country to terrorize the east – can be regarded as “brothers” of the US armed forces.

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Authored by Martin Sieff via The Strategic Culture Foundation:


George Friedrich Wilhelm Hegel was right – Again: The only thing the human race learns from history is that it learns nothing from history.

In 1914,the British Empire, largest in human history and one of the longest-lasting, charged into World War I to defend “gallant little Belgium” whose King Leopold over the previous 30 years had carried out one of the longest, largest genocides of all time, killing 10 million people in the Congo.

Germany, wealthiest, most prosperous nation in Europe, blundered into the same needless war when feckless Kaiser Wilhelm II causally gave sweeping approval to Austria-Hungary to annihilate the tiny nation of Serbia. Millions of brave and idealistic Russians eagerly volunteered to fight in the war to protect “gallant little Serbia.” Most of them died too. There is no record that any of the Serbian leaders after the war visited any of their mass graves.

Now it is the United States’ turn.

Since the end of the Cold War US policymakers, presidents and their congresses have carried out virtually every stupidity and folly imaginable for any major power. The only one they have so far avoided has been the danger of stumbling into a full scale world war.

However, now, with the escalating and increasingly hysterical US support for the shady and risk-taking junta in Kiev, President Donald Trump risks committing that most dire and unforgivable of all horrors.

Trump today is no more than putty in the hands of his national security adviser John Bolton, one of the masterminds of the catastrophe that was the 2003 invasion of Iraq.

Bolton is just like his hero Winston Churchill a century ago during World War I. He always gets his way, always gets the wars and battles he wants and bungles them embarrassingly every time. And like the young Churchill, Bolton never learns, never mellows and he never changes. It is always everybody else’s fault.

Churchill finally did grow and learn. His famous activities of the 1930s were not meant to start a new world war with Germany under the far worse leadership of Adolf Hitler: He wanted to avert such a war.

The invaluable diaries of Ivan Maisky, the Soviet Union’s ambassador to Britain through the 1930s make clear that even then Churchill was eager – alone in the British ruling classes – to establish a serious close defensive alliance with Josef Stalin and the Soviet Union. He recognized that would be the only way to box in Hitler and prevent a global catastrophe.

But Bolton has not learned from his hero – Quite the reverse. He is now impelling Trump on a reckless course of empowering the dangerous adventurers who with US support have seized Ukraine and have spent the past nearly five years wrecking it.

Even worse, the same kind of absurd sentimentalizing of an obscure, tiny or unstable ally that doomed Britain, Russia and Germany to unimaginable suffering and loss in 1914 now permeates US decision-makers, strategists and their pontificating pundits about Ukraine. On March 1, 2016, US General Philip Breedlove, then NATO Supreme Allied Commander Europe (SACEUR) memorably referred to “our Ukrainian brothers and sisters” in a Pentagon press briefing

There is no way in any sane assessment that the ramshackle Ukrainian forces – and certainly not the neo-Nazi militias recruited in the west of the country to terrorize the east – can be regarded as “brothers” of the US armed forces. The US and Soviet troops who met on the River Elbe on April 25, 1945 after advancing a combined more than 2,000 miles to liberate Europe from the darkest tyranny in its history could truly be called “brothers.”

However, the US military today and the Ukrainian forces they are being drawn in to protect certainly are not “brothers and sisters.” No poll has been taken since then across the United States, as far as I am aware as to whether the American people would be willing to risk full-scale nuclear war to defend a government in Ukraine that is demonstrably unpopular among its own people.

Trump was elected president in November 2016 precisely because he was the only candidate in that shock election who unambiguously called for the United States to end its 70-year fixation with getting pulled into one endless war and confrontation after another around the world. It would be the darkest of ironies if instead he took America into its last and most catastrophic conflict – a nuclear confrontation from which there could be no recovery, no escape and no survival.

Britain, Russia and Germany in 1914 were all destroyed by the deliberate plotting and manipulations of vastly smaller or weaker allies run by psychopathic gamblers. The rulers of Kiev today, in their entirely reckless disregard for the dangers of global thermonuclear war clearly fit into that category.

Policymakers in Moscow recognize this dire reality. Their counterparts in Washington remain amazingly totally blind to it. Their only idea of strategy is the suicidal stampede of the Gadarene Swine in the Gospels off the end of a cliff. And they are taking the entire human race with them.

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