The “Chinese way” for Russia and a stablecoin pegged to gold for settlements

Prophet in his own country

In economic circles, Sergei Glazyev is treated differently. For his bold statements, he has long received a reputation as a shocking person, although his forecasts have actually acquired the status of prophecy for the Russian economy. Thus, it was Glazyev who warned about the inevitable blocking by the West of the reserves of the Bank of Russia and the government, about the complication of settlements in dollars and euros, about the need to create barriers to the export of capital to accumulate investment resources and lower rates. For many years, these words caused ridicule from colleagues and liberal publications, but today it is impossible to deny that all this has become a reality in which the Russian economy has to survive.

The Minister for Integration and Macroeconomics of the EEC also has a recipe for getting out of the current crisis. In his opinion, Russia needs a mobilization economy with extensive market tools. In our country, it is necessary to create as soon as possible a system of strategic planning with appropriate mechanisms of responsibility, the subordination of monetary and all other areas of economic policy to the goals of economic growth and raising the welfare of the population. “This type of economy has operated and continues to operate in China,” Glazyev noted. Growth targeting should underlie macroeconomic policy. A loan is created for the growth of investments. Thus, the main source of investment financing in the Chinese economy, especially in the first 10 years of its recovery, were targeted loans: for priority areas – at a rate of 0.2%, for the public sector – 2%, for private borrowers – 4%.

The expert recalled that under such conditions, the Chinese economy has grown 8 times since 1995 in terms of GDP, 14 times in terms of investment, and 20 times in terms of lending. This suggests that the main instrument for financing investment in development was centralized loans, which were created by the state banking system under tight control over the movement of cash flows. Such a mechanism for financing economic development underlay all the economic miracles of the past and present centuries, including our country, the United States and post-war Europe, today’s countries of Southeast Asia.

“If we took this path, we would live 3 times better today,” Glazyev is sure. “And along with China and India, they would form the core of a new world economic order.”

In response to the result that we received

According to the economist, for the implementation of such an approach in Russia, one simple condition is necessary – a system of responsibility of those in power for the results of their activities. If one or another leader or management structure does not achieve its goals, it means that they are incompetent and must be replaced.

In addition, the tasks of the management system must be coordinated at all levels and for all functions: the economy cannot live in a situation where it is torn apart by the interests of various economic departments and government organizations. “Now state-owned companies and corporations are working for the same interests, state-owned banks are working to satisfy the ambitions of their leaders, the government is pursuing stabilization goals, the Central Bank is serving the interests of financial speculators,” Glazyev explained his position in an interview. “There is no system.”

Not strong or weak, but a stable ruble

The former adviser to the President of the Russian Federation recalled that the path taken by our monetary authorities in order to weaken the ruble is to reduce the flow of foreign currency into the economy. “Despite the seizure of Russian foreign exchange reserves and assets by unfriendly countries, the Bank of Russia resumed the policy of minimizing restrictions on the export of capital from the country: it canceled the recently restored mandatory sale of foreign exchange earnings, consistently increases the limits for transferring money abroad, and ignores the need to resume foreign exchange controls,” Glazyev emphasized. . In other words, the Bank of Russia proceeds from the fact that exporters can leave their proceeds abroad, effectively condoning the export of capital.

So far, the authorities in Russia have taken the path of import deregulation: they temporarily abolished customs duties on the import of a very wide range of goods, significantly weakened the requirements for quality control of imported goods, the compliance of which with the technical regulations of the EAEU will be accepted at the request of business entities. But stimulating imports and weakening control over the compliance of imported goods with safety requirements is a bad sign for the Russian industry, since this discredits many years of work on the development of its own production. “We need to bet on loading existing capacities, linking resources in the production of our own goods, developing international industrial cooperation, implementing joint investment projects, including abroad,” Glazyev noted in an interview. “And increasing the outflow of foreign currency for the purchase of imports should not be an end in itself.”

Answering the question of Vedomosti about the existence of an alternative, the ex-adviser to the President of the Russian Federation proposed a simple mechanism to stabilize the ruble. “As long as we have a positive trade balance, we can afford to fix the exchange rate at any reasonable level – at one that we consider objectively consistent with the level of our competitiveness,” he explained to a journalist. The authorities will have to determine an operator who would buy the excess currency from exporters at this rate, crediting them with the equivalent in rubles. The operator will be able to sell the currency of friendly countries on the exchange, use it for government needs, for the implementation of joint projects and investments in these countries. You can consider investing in infrastructure facilities that contribute to the growth of Russian exports, or insuring export cargo in national currencies, etc.

And the currency of unfriendly countries can be used for the early repayment of Russian external obligations – both sovereign and corporate, import financing, providing loans to friendly countries, for example, within the framework of the Eurasian Economic Union, the economist emphasized.

Not single targeting

According to Glazyev, one should not argue about whether to target the exchange rate or inflation, it is necessary to manage both, and also target many more indicators. “To focus solely on one target indicator, and leave everything else to the will of the market, for example, to target inflation, while throwing the ruble into free float, is managerial absurdity,” the expert said. — After all, fluctuations in the exchange rate of the ruble, especially its sharp devaluation, are the main factor in generating inflation. The fallacy of this policy led to enormous losses. According to our estimates, the damage in 2014-2021 amounted to more than 30 trillion rubles of non-produced products, including 20 trillion of unfinished investments.”

The main factor generating inflation in Russia was the devaluation of the ruble. With a threefold excess of gold and foreign exchange reserves (GFR) over the monetary base, the ruble exchange rate could be fixed at any reasonable level. For example, after its collapse in 2014 to the corridor of 70-80 rubles per dollar, the exchange rate of the Russian national currency could be fixed at this level for a long time – up to the present. After that, Russia would be able to achieve low inflation, the expert is sure.

Down with the speculators

According to Glazyev, the policy of a floating ruble in the conditions of free cross-border movement of capital has led to international financial speculators manipulating the ruble exchange rate, taking advantage of the fact that the Bank of Russia does not enter the market to stabilize it, although it has an excess of foreign currency. When speculators “knock down” the ruble, an inflationary wave begins, which the Central Bank tries to extinguish by raising the key rate. Money becomes more expensive, credit shrinks, which leads to lower investment. “A reduction in capital investment entails a technical degradation of the economy, and in 3–4 years, in order to maintain its competitiveness, the ruble needs to be devalued again,” the academician explained the situation to a journalist. — Speculators use oil price fluctuations or a new wave of sanctions as an excuse to attack the ruble. The ruble depreciates again, inflation accelerates, and the Central Bank again raises the interest rate.” And Russia has been walking in this vicious circle of economic degradation for many years.

Over the past six months, the situation has only worsened. On the one hand, unfriendly countries have introduced barriers to the import of domestic goods. On the other hand, due to high commodity prices, there is a powerful inflow of foreign currency into the country, which ensures the maintenance of a steadily positive trade balance. As capital outflows have declined since the latest sanctions, the balance of payments is now dominated by the trade balance, which remains positive. Foreign exchange reserves can be dispensed with as long as exports exceed imports, subject to restrictions on the export of capital and control over cross-border non-trade operations, the scientist believes.

It’s all about balance

Glazyev is sure that the reserves are needed to increase lending to industrial investments, in other words, for development purposes. So far, the Russian authorities can expand the economy through a positive trade balance that provides foreign currency for purchases of foreign equipment and technologies. But one must understand that this may turn out to be a short-term phenomenon, since such a situation arose, on the one hand, due to market factors – an increase in prices for export goods, on the other hand – due to political decisions, including the erection of barriers by the EU.

By the end of this year, logistical restrictions will be overcome. “After trade balances out, an increase in imports of equipment for investment projects implemented through loans without foreign exchange reserves will lead to a depreciation of the ruble,” predicts the former adviser to the President of the Russian Federation. “Therefore, now it is necessary to replenish them primarily through the purchase of gold. The Central Bank needs to increase its activity in this direction and bring the share of gold in the composition of gold reserves to 80%.

In response to Vedomosti’s remark that the liquidity of Russian gold under the conditions of the West’s embargo on its purchases is in question, Glazyev announced the need to quote Russian gold on world markets. “This means that you need to introduce your own gold standard, which would be recognized at the international level, with a gold quotation on the Moscow Exchange and completely get rid of the London Stock Exchange,” the EEC Minister for Integration and Macroeconomics believes. This Eurasian standard must first be agreed upon with Russia’s partners, for example, in the SCO. The expert is confident that Russian gold will be quite liquid in the Asian and global markets in general, regardless of the position of Western countries. “At the same time, we could introduce a new international payment and settlement instrument — a stablecoin pegged to gold — and offer it to all Asian countries,” Glazyev recommended. “In the future, other commodities produced in the SCO countries can be added to gold as collateral for the new world settlement currency.” Together with a pool of their foreign exchange reserves, this would become the basis for creating a very stable and reliable payment instrument, an alternative to the current ones, the economist concluded.