Weekend Economists Light the Candles December 19-21, 2014

[Demeter]

7. How Putin’s Fealty to the Washington Consensus Made His Currency Crisis Worse

http://www.nakedcapitalism.com/2014/12/how-putins-fealty-to-the-washington-consensus-made-his-currency-crisis-worse.html?utm_source=feedburner&utm_medium=email&utm_campaign=Feed%3A+NakedCapitalism+%28naked+capitalism%29



Who needs sanctions when intellectual capture produces such swimming results? The US-led restructuring of the Russian economy after the USSR fell is a gift that keeps on giving.

Hoisted from comments:

Ben Johannson
December 16, 2014 at 8:00 am

My understanding is tha Russia allows conversion of domestic deposits into USD. That needs to stop immediately. Until it does these rate hikes are going to be seen as acts of desperation, increasing stampede out of the rouble.

Put banks into receivership, push losses off on foreigners and when the dust clears return them to normal operations with a new restriction: if they can’t get USD on the fx markets, don’t come to the central bank asking for them.

Anyone have an in with the Kremlin? I sent an email to the President’s office but my opinion isn’t worth a damn. I really don’t want to see Russians go through a repeat of 1998.

Jim Haygood
December 16, 2014 at 9:04 am

‘My understanding is that Russia allows conversion of domestic deposits into USD. That needs to stop immediately.’

From the central bank’s point of view, yes. Rate hikes rarely work to defend a collapsing currency, when the underlying cause is likely capital flight.

For ordinary citizens (not the oligarchs, who already have houses and bank accounts in London), capital controls are harsh medicine. Foreign study or travel becomes difficult or impossible. Supplies of newest-model computers, phones, and even spare parts for old equipment dry up.

Some US economists take a remarkably nonchalant attitude toward capital controls, never actually having had to live under them.
Ben Johannson
December 16, 2014 at 2:50 pm

No one is talking about capital controls, this is an issue of currency sovereignty. Russians need to be stopped from converting the roubles in their accounts to USD and the country as a whole should be de-dollarized. There is no good reason for Russia to allow financial control of domestic policy by foreign investors and governments.

It would help for someone to tell Putin this; so far his government has acted stupidly in its response.
bob
December 16, 2014 at 3:03 pm

“There is no good reason for Russia to allow financial control of domestic policy by foreign investors”

Foreign investors? A russian oligarchs best friend is his dollars, or pounds. Do you really think they’re gonna let a guy like putin be in charge of their capitol?

They know exactly what kind of guy he is, one in the same.

If he stopped “allowing” the conversion, which isn’t really accurate anyway, he’d piss all his buddies off.
Carolinian
December 16, 2014 at 3:28 pm

I offered up this link for a reply already but I guess the comment was too long.

http://cluborlov.blogspot.nl/2014/12/can-anybody-find-me-central-banker-to.html
Ben Johannson
December 16, 2014 at 5:48 pm

Orlov is correct: the Russian central bank is an enormous part of the problem in refusing to move toward greater financial independence for the country and Putin himself appears captivated by Washington Consensus thinking. Unless this changes it’s 1998 all over again.

1) stop convertibility

2) raise taxes to reduce quantity of roubles and engineer a revaluation.

3) denominate oil transactions in roubles.

Yves again. Via e-mail, Mark Ames points out that it would have been extremely destabilizing politically to ban convertibility, but that isn’t something you do overnight. It’s something that in an ideal world should have been curtailed over years.

And to give more context, here are the critical sections of the ClubOrlov post that Carolinian mentioned above:

….at the moment Putin is pushing on a string. You see, once you staff the central bank with economic liberals trained to follow the dictates of the IMF, and do nothing to shut the revolving door between the central bank and other big banks (after all, if the Wall Street boys can do it, why can’t the Russians?) then why wouldn’t they rob their own people every chance they get, then attempt to use their ill-gotten gains to subvert the political system—just like the Americans have done?

Some people are starting to loudly criticize Putin for his inaction; but what can he do? Ideologically, he is a statist, and has done a good job of shoring up Russian sovereignty, clawing back control of natural resources from foreign interests and curtailing foreign manipulation of Russian politics. But he is also an economic liberal who believes in market mechanisms and the free flow of capital. He can’t go after the bankers on the basis of ideology alone, because what ideological differences are there? And so, once again, he is being patient, letting the bankers burn the old “wooden” ruble all the way to the ground, and their own career prospects in the process. And then he will step in and solve the ensuing political problem, as a political problem rather than as a financial one.

This strategy carries a very substantial opportunity cost. After all, if the central bank acted on behalf of regular Russians and their employers, it could take some very impressive and effective steps. For instance, it could buy out western-held Russian debt and declare force majeur on its repayment until financial sanctions against Russia are lifted. It could drop its interest rate for specifically targeted domestic industries—those involved in import replacement. And, most obviously, it could very effectively curtail the activities of well-connected financial insiders aimed at destroying the value of the ruble. Putin said he knows who they are. I hope that they are wearing adult diapers. I wouldn’t be at all surprised if they get Khodorkovskied before too long.

So the currency crisis besetting Russia has a bigger internal component than most observers realize. Orlov points out, as we have, that Russia is a comparatively low cost producer, and the slide in the ruble makes it more so, so in theory it should be able to ride out this downdraft. Or as Ames put it, “Russia’s been broken a few times already. It’s not going anywhere.”