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Although Central Bank chairman Sergey Ignatyev is in the shadow of the world financial crisis, the Central Bank's actions are altogether comparable with those of the U.S. Federal Reserve Board and Treasury Department.
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Oct. 09, 2008
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Medvedev Declares Socialism Built
// In various of the United States
Russian President Dmitry Medvedev, speaking at an international forum in the French resort town of Evian, stated yesterday that Russia intends to attain “multipolarity” not only in world politics, but in the economy too. He announced the arrival of “financial socialism” in the United States. However, the extraordinary measures taken to support the markets in the U.S., Russia and European Union differ little from each other, and they are actually somewhat larger in scale in Russia than in the U.S.
Russian President Dmitry Medvedev, speaking at an international forum in Evian, France, yesterday, stated for the first time the basic principles of the extraordinary measures taken to regulate the Russian financial system since August and Russia’s priorities for the development of the post-crisis world economy. “Multipolarity” in the economic world, according to Medvedev, can be attained by “get[ting] rid of the serious imbalance between the amount of issued financial instruments and the real returns on investment programs,” strengthening risk management systems, making company information maximally available, tightening oversight of them and removing barriers in international trade and the free movement of capital. “The example of the U.S.,” the Russian president said, “and others too, has shown that it is just one step from self-regulated capitalism to financial socialism. What’s more, we see them ready to nationalize one asset after another. Factors for stability in this situation would be the creation of new financial centers and strong regional currencies.”

So far, the anticrisis measures taken by the Russian government, president and Central Bank do not differ substantively from the actions of U.S. Federal Reserve Board and Treasury Department or the central banks and finance ministries of most other countries. The only difference has been the scale of the intervention and support offered in Russia, which is also comparable with the actions in the U.S. on the scale of national economies. In Russia, the refinancing of Russian companies (up to $50 billion) by Vneshekonombank is analogous to the first part of the Paulson plan, which will spend up to $350 billion to buy up bad assets. The spending limit on asset buys in the Paulson plan is 2.4 percent of the 2008 U.S. GDP, while the Vneshekonombank plan has a limit of 2.8 percent of the 2008 Russian GDP (44 trillion rubles, as forecast by the Finance Ministry). The full price of the Paulson plan, including those measures, is up to $1 trillion, or about 7 percent of the U.S. GDP. In Russia, the measures announced so far (costing up to 4 trillion rubles) total up to 9 percent of the GDP.

So far, comparisons with the central banks of European countries still favor Russia. The plan announced by the Bank of England for the recapitalization of the banking system is for £200 billion, or 10 percent of the GDP of Great Britain. The Russian plan to recapitalize the banking system will cost the state 950 billion rubles, or 2 percent of the GDP. And the Russian banking system is significantly less developed than in Great Britain. At present, Russia is the only major country to announce officially that it will use budget funds to support its stock market (up to 500 billion rubles this year and next). Finally, just as the U.S. Federal Reserve Board unsealed its exchange stabilization fund on September 19, Russia announced on October 9 that it was accessing its sovereign funds. Deputy Prime Minister and Finance Minister Alexey Kudrin stated that it would be necessary to take 450 billion rubles ($19 billion from a total of $190 billion) from the sovereign funds to implement the decision to provide support to the banks.

Thus, 450 billion rubles from the reserve fund or the national prosperity fund will be spend to support VTB and Rosselkhozbank and provide credits of 225 billion rubles to the banking system as part of the government’s plan to recapitalize the banks. Both sovereign funds are part of the Central Bank’s international reserves. The Russian State Duma is to approve a package of laws on October 10 that, among other things, provide Central Bank deposits in Vneshekonombank at the rate of LIBOR+1% per annum for a sum of up to $40 billion. Although Russia’s international reserves are formally left untouched in this case, the Central Bank is reducing the security of Russian rubles reserves by sharing with Vneshekonombank the risks of refinancing companies.

Central Bank data of October 1 indicate that September reserves fell 4.4 percent to $556.1 billion. Another 450 billion rubles (about $17 billion) and a credit to Iceland that may reach ˆ4 billion practically guarantee a reduction in the security of ruble reserves by $65-70 billion or, based on the current volume of reserves, 11-12 percent. According to the Central Bank balance published Tuesday, its assets on September 1 totaled 15 trillion rubles; supplemental obligations it had taken on came to up to 1.8 trillion rubles. If the volume of the reserves remains unchanged, the reserve security of the ruble in the Central Bank balance, which was about 26 rubles to $1 of reserves on September 1, will drop to 29 rubles and, with the formal allocations from the sovereign funds, it will be over 30 rubles. For many months, the Central Bank claimed a correspondence between “the ruble in assets to the dollar in reserves” at the current exchange rate, which could be called a hidden currency board.

Economists say the Central Bank and government were forced into the actions they took and suggest that the ruble would be in even more danger otherwise. Alexey Moiseev of Renaissance Capital told Kommersant that the unsealing of the sovereign funds is “bookkeeping that doesn’t substantively change anything.” He added that “the absence of those measures would lead to pressure on the ruble, inflation and a halt to economic growth, and not the other way around.” Oleg Solntsev from the Center for Macroeconomic Analysis and Short-Term Forecasting suggested that “no serious negative macroeconomic consequences will follow from that step. They will be very moderate and slow in coming.” Solntsev says that the structure of the Russian economy helps. “The main participants will be the Central Bank, Finance Ministry and state banks and, most likely, conditions will be set so that the money does not enter the economy or does not enter quickly,” he said.

The first danger from the unsealing of the sovereign funds will not be a problem with the ruble, but the possibility of the lowering of the Russian Federation’s ratings. In the middle of September, Standard & Poor’s placed its Russian ratings on the watch list with a “negative” prognosis, stating that the falling reserves will be reason for reconsideration of the ratings. Russia received its first investment ratings from Moody’s in 2003.
Dmitry Butrin, Maxim Shishkin, Alexey Shapovalov, Suzanna Farizova

All the Article in Russian as of Oct. 09, 2008

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