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May 12, 2022
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Professor Katasonov: The ruble changes the rules of the game

Professor Katasonov: The ruble changes the rules of the game

Photo: Egor Aleev / TASS

May 9, 2022 President of the Russian Federation Vladimir Putin signed a decree on the creation of an interdepartmental working group to develop new mechanisms in the field of foreign exchange regulation and international settlements. Such a decision is overdue and even overripe. I would like to believe that “the ice has broken.” After all, two and a half months ago, a completely new situation arose for Russia in the sphere of currency relations and settlements with other states. The new situation is generated by the beginning of a powerful sanctions war of the collective West against Russia.

The operations of many Russian banks passing through the SWIFT system were blocked, access to correspondent accounts in foreign banks was closed, the foreign exchange reserves of the Russian Federation in the amount of more than $300 billion were frozen, foreign accounts of Russian banks and companies began to be arrested, bank cards of Russian individuals in foreign credit organizations, etc.

Such sanctions impede the further activities of the Russian Federation in the foreign economic sphere, create the risk of repeated freezing of foreign exchange funds coming from exports. Old mechanisms do not work in new conditions. The creation of new ones had to start from the end of February. Or even since 2014, when the collective West began to impose the first sanctions against our country. But, as they say, better late than never.

The order dated May 9 includes the Regulations on the interdepartmental working group and the list of members of this group. In fact, the working group is a coordinating center that ensures the interaction of various government departments to solve problems related to the creation of a new system of currency relations and settlements between Russia and other states. The working group includes the Minister of Economic Development, the Minister of Finance, the heads of Rosfinmonitoring, the Federal Customs and Tax Services, the Chairman of the Bank of Russia, officials of the Ministry of Industry and Trade, the Ministry of Energy and the Ministry of Agriculture and the Ministry of Foreign Affairs, representatives of Rosoboronexport and the presidential administration.

The group was headed by the assistant to the head of state Maxim Oreshkin. The organizational and technical support of the working group’s activities and control over its activities are entrusted to the Expert Directorate of the President of the Russian Federation.

The most important thing at the disposal is point 3 of the Regulations on the working group, where its main tasks are formulated. There are 10 sub-points in total. In a somewhat abbreviated and aggregated form, I will present some of them:

— development of a plan for the formation of an infrastructure for international settlements with trading partners from friendly countries and territories, including in rubles and national currencies;

– development of a similar plan, but in relation to states and territories included in the list of unfriendly countries;

— control over the implementation of these plans;

— determination of the procedure for settlements in rubles or national currencies with partners from the lists of friendly countries and the procedure for settlements with partners from the list of unfriendly countries;

– preparation of proposals to the president and the head of his administration;

— shaping Russia’s position in international negotiations on settlement mechanisms with foreign states.

Some of these tasks will have to start almost from scratch. The implementation of other tasks began in 2014, but was carried out extremely sluggishly. For example, in 2016, the Bank of Russia announced the creation of a domestic alternative to the SWIFT system, called SPFS (Financial Message Transfer System). However, SPFS was used extremely poorly (mainly for currency transactions between Russian banks and companies, for international transactions the SWIFT system was still used).

Before the start of the sanctions war, there were only a dozen foreign banks and organizations among the participants in the SPFS. By the end of April this year, their number had already exceeded six dozen. But this is still extremely insufficient to do without the SWIFT system. It is hoped that the working group will prepare proposals that will allow more active use of SPFS and other alternatives to SWIFT.

I want to draw attention to two sub-points from point 3, I reproduce them in full:

e) development of measures of foreign exchange regulation in order to ensure the balance of supply and demand when performing transactions in the foreign exchange market;

f) development of state policy measures aimed at:

to reduce the risks associated with the suspension of operations with foreign assets of the Russian Federation;

to ensure compliance of the structure of the balance of payments of the Russian Federation with the goals of stable economic development“.

As I understand it, in subparagraph (e), “balancing supply and demand,” currencies are not an end in themselves. With the help of such a balance, a more important goal is probably being pursued – ensuring the stability of the ruble exchange rate. I believe that such a goal should become the cornerstone of building a new monetary system in Russia.

Without the stability of the ruble exchange rate, we will not be able to convince our trading partners (both from unfriendly and even friendly countries) to switch to settlements in the Russian currency. The instability of the ruble exchange rate will also become a serious obstacle to solving the internal problems of the country’s economic development. Purchases of machinery and equipment for Russian companies, even in foreign currency, will be risky. Regulation of demand and supply of currency in the domestic market can be more or less successful only if there is a strict control over the cross-border movement of capital.

At the beginning of March, such measures were supposedly introduced (as temporary), but this did not save the Russian ruble from incredible somersaults: at first, the ruble exchange rate began to fall, reaching the level of 113 rubles per 1 US dollar on March 10. And then the swing turned the other way, and the Russian ruble reached a record high in early May – less than 70 rubles per US dollar. The Bank of Russia has already considered that the Russian ruble has stabilized and has begun to ease foreign exchange restrictions. But it’s dangerous. There are signs that in a few months the swing will again go towards the weakening of the ruble.

I am also embarrassed that subparagraph (e) provides for the continuation of operations in the domestic foreign exchange market. The Bank of Russia, as you know, has not been selling or buying foreign currency since the end of February – the beginning of March. Russian commercial banks operate in the foreign exchange market, which accumulate “toxic” currencies in their accounts – US dollars, euros, British pounds sterling, Japanese yen, etc. At any moment, the collective West can simultaneously press buttons and reset all these foreign currency accounts of Russian banks. Isn’t it clear that foreign currency should be banned on the domestic market of Russia?

Only the Russian ruble should circulate in Russia, as prescribed by Article 75 of the Constitution of the Russian Federation. And if this article of the Constitution of the Russian Federation is not enough for someone, then the current Criminal Code of the Russian Federation should be supplemented with an article on a ban on the use of foreign currency, similar to the one that was once in the Soviet code (the Criminal Code of the RSFSR).

And if this condition is met, then the foreign currency will be used exclusively to support foreign economic transactions. The exchange rate of the ruble against other currencies could be fixed at a certain level. Perhaps, at first, apply several courses for different kinds of operations and different categories of participants in operations. And the exchange rate of the ruble against other currencies should be reviewed only occasionally, taking into account possible significant changes in the purchasing power of other currencies. Instead of directly linking the Russian ruble to the dollar and other currencies, it would be possible to tie it to gold (gold parity of the ruble), and track the ruble exchange rate against other currencies through gold prices in US dollars, euros, British pounds, Japanese yens, etc.

Subparagraph (e) is very relevant. The “reduction of risks associated with the suspension of operations with foreign assets of the Russian Federation” mentioned in it is nothing more than the avoidance of possible repeated freezing of the foreign exchange reserves of the Russian Federation. The easiest way to mitigate such risks is to minimize the value of Russia’s foreign exchange reserves. Foreign exchange received by Russia from the export of goods should not be accumulated in stocks and reserves. It must move (by the way, in English the currency is currency, which literally means something “moving, flowing”).

Recall that in the USSR, international reserves consisted almost exclusively of gold (which cannot be “frozen”, arrested or confiscated), and foreign currency coming from exports was immediately “off the wheel” directed to import purchases. Including the purchase of machinery and equipment necessary for the construction of new and modernization of existing industrial facilities.

In the Soviet planned economy, export and import operations were closely coordinated and matched in time, and import operations, in turn, were aligned with the plans for the development of the national economy of the USSR. Soviet economic planning was very multifaceted and included plans for: exports, imports, foreign exchange, capital investments, etc.

Paragraph (e) formulates such a task as “ensuring that the structure of the balance of payments of the Russian Federation is in line with the goals of stable economic development.” But if it is resolved consistently, then we will inevitably come to the recognition of the need to coordinate the foreign economic activity of the Russian Federation and activities to develop the domestic economy. And such coordination is unthinkable without planning for both.

In a word, Russia today finds itself in a situation that is very similar to the one that arose about a century ago. The then Soviet Russia found itself under a rigid blockade of its former allies in the Entente. The collective West began to stifle Russia in order to return it to its fold as a raw material appendage and a semi-colony. It was then that the idea of ​​industrialization was born in the USSR. Which began to be implemented from the end of the 1920s. It was at the turn of the 1920s and 1930s that a radical change in the economic model took place – the transition from the liberal market model (NEP) to the model of the mobilization economy. It is precisely today that we need such a transition.

Based on the Soviet experience, the new economic model in terms of the monetary sphere should include the following elements:

– use of the state monopoly of foreign trade;

— use of the state currency monopoly;

— plans for export and import operations and their linkage with planning for the development of the domestic economy;

– the formation of international reserves exclusively with the help of monetary gold;

— establishment of a fixed exchange rate of the ruble against foreign currencies;

– a ban on the use of the ruble outside the national jurisdiction;

— use of currency clearing for settlements with trading partners;

– the use of a supranational currency unit (such as the transferable ruble, which was introduced in 1964 within the framework of the Council for Mutual Economic Assistance) for settlements with friendly states, etc.

Those who wish to get acquainted in more detail with how the Soviet system of currency relations and settlements was arranged can refer to my book: “Russia and the West in the XX century. Experience of economic confrontation and coexistence» (M.: Institute of Russian Civilization, 2015).

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