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Russian Government funds to flow through - real economy still waiting

Russia is channeling tens of billions of dollars into the financial system to prop up the economy. But many Russian companies complain the banks are not passing it on.

Yahoo StumbleUpon Google Live Technorati Scoop del.icio.us Digg Sphinn Furl Reddit Russia’s bailout plan tops $200 Billion, more than that of the United States when you compare the size of the economies. Presidential Aide Arkady Dvorkovich insists the measures are adequate.

“The banks need to be sure that within several months - and that’s the time frame we can realistically hope for - they can get a set amount of financing. Once they know for sure that they can count on this money, they will begin to lend again.”

It’s taken a heavy toll on the Central Bank’s reserves. They’ve lost over $100 Billion since August, spent on supporting banks and defending the Ruble.

Starting in October, the State has been offering unsecured loans to a wide range of Russian banks. The money is meant to help companies re-finance their debt to Western banks. But Russian businesses have issued an SOS - complaining they haven’t seen the money.

So where did it go?

Richard Hainsworth, from RusRating says the banks are sitting on a pile of cash, fearing the worst is still to come:

“Obviously, the state-owned banks have got a lot of cash. They are the ones who should be lending. They fact that they are not lending is really the crisis of corporate governance and they should overcome that. I expect to see Sberbanks and the like beginning to lend by next week.”

According to Pyotr Aven, the head of Russia’s largest private bank, Alfa-Bank, the state should attach strings to any cash offers – only those banks that agree to finance the real sector of the economy would get state money.

“We are provided by Ministry of Finance and Central bank with unconditional money. We can do with this money what we want. So I wouldn’t be against if they tell us here’s the money but that’s how you have to use it. To finance this or that sector or even more exact - this sort of enterprise or something like that. They have to provide conditional financing to be sure it goes to the real sector.”

The crisis is starting to paralyze the economy. This week, four of Russia’s largest energy companies said they’ve asked the government for loans to pull them through next year.


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Russia Can Escape the Financial Crisis in Real Economy

By: Former advisor to the Russian president, economist Andrei Illarionov

A Statement by the Liberal Charter alliance

The Liberal Charter alliance expresses its fundamental disagreement with the measures taken by Russian authorities in the financial crisis, and puts forth the principles of a fiscal policy that a government responsible to the citizens of Russia must take.

1. Today’s financial crisis in Russia has foreign and domestic causes. The most important external cause of this crisis is the world monetary system, which goes through cyclical phases of boom and bust. Such instability is created first of all by modern money, which governments can issue in any amount, combined with a wide range of government privileges and guarantees provided to commercial banks. Interest rates held at artificially low levels and government loan guarantees stimulate the growth of credit that is not backed by real savings, leading to less responsibility on the part of creditors and borrowers, and a collapse of confidence in financial assets.

The main culprits of the global financial crisis are the fiscal authorities in the U.S. and European countries, who have pursued a policy of so-called “cheap” money in recent years. The governments of other countries, including Russia, also carry their share of responsibility for spreading and worsening the crisis. Government encouragement of credit expansion has led to massive investments into overly risky, inefficient, and unsalable projects. The illusion of the accessibility of investment resources, created by governments, has led to a decline in the quality of issued loans and purchased securities. As result, many banks have been unable to meet their obligations before depositors.

2. The Russian authorities have contributed their share to the financial “bubble” in our country. Due to their privileged status, state-owned and partly state-owned banks and companies borrowed heavily on foreign and domestic markets. In doing so, short-term loans were used for long-term investments, and to finance expenditures growing out of control. The disappearance of cheap credit destroyed such financial “pyramids”. With a fall in equity prices, companies whose shares were put as collateral to private and partly state-owned companies to obtain credit were now under threat of handing ownership to those creditors, including foreign ones. The threat that companies would be punished for their irresponsible borrowing policies became an instrument of their pressure on authorities, and the basis for transferring their colossal accumulated debts to the federal budget.

3. Provoked by government intervention, the mistakes made by banks and businesses are at the present largely irreversible; serious problems can no longer be avoided. The economy must undergo a period to correct those mistakes.

4. Presently, the primary danger to the global and Russian economies are the so-called “anti-crisis programs” put on by governments, which are hidden behind demagogic statements that the “free market” is supposedly to blame for the current crisis. Government intervention, which hinders the culling of inefficient investment projects, blocks the review of mistaken decisions and puts off the bankruptcy of irresponsible businesses, only deepens and extends the financial crisis, turning an inevitable short-term economic decline into a long-term depression. In world history, it is precisely the interference with market mechanisms that has had such dire consequences, such as the US Great Depression from 1929-33, or the transformation of Great Britain into the “sick man of Europe” from 1961-79, or the Japanese stagnation from 1991-2004.

5. The Liberal Charter alliance expresses a fundamental disagreement with the actions already undertaken, as well as the stated intentions of the Russian authorities – the president, parliament, government, and the Bank of Russia. Their plans of uncontrolled intervention in the country’s economy are, among other things, a disregard for the rule of law and the existing legislation, the undoing of the separation of powers, and the dismantling of democratic institutions accountable to the people.

We believe that the proposed measures are wrong. [These include] the use of federal resources, administered by the Government and Bank of Russia, to finance irresponsible borrowers, to support banks and stock market speculators who risked their client’s money, as well as acquiring shares of those companies that the market has lost confidence in. These measures will squander the federal gold reserves, which guarantee the value and free convertibility of the Russian ruble. They will inevitably result in higher prices for the public, who will end up paying for benefits essentially doled out to businessmen and managers close with the authorities. The concentration of financial resources in the hands of bureaucrats and their “inner circle” is aimed at further monopolization of property and power in our country.

6. In this time of crisis, a government responsible before the Russian people must follow financial policies based upon the following principles:

-Maintaining the exchange rate of the ruble against the pre-determined dollar and euro currency basket. A guarantee of the sanctity of gold reserves in the Bank of Russia to back 100% of issued Russian rubles. Continuing a responsible monetary policy, dictated by the basic principles of respect for property rights and meeting ones obligations, even if these obligations were not explicitly formalized.

-Preserving a deficit-free budget, where expenditures do not exceed revenues, [and committing to] prohibit the growth of public debt. At a time of unavoidable economic stagnation, public expenditures must be lowered proportionately with the fall in government revenues.

-Establishing transparent mechanisms for distributing assistance from the state budget and special endowments. Excluding the possibility that these funds will head to privileged banks and companies. The main way to use the budget surplus, which has accumulated in special endowments, must either be the return of previously collected taxes, or a reduction in future taxes.

- Directing funds from the budget and special endowments to commercial banks only in exceptional cases, and only through the mechanism of returning money to depositors (the so-called “monetization of bank liabilities”). The banks subjected to this measure must undergo bankruptcy proceedings. This provides an effective countermeasure to owners stripping assets, and allows for an open and transparent sale of all assets, with revenues going to the state budget. The expansion of a government role in the banking system’s equity is impermissible.

-It is unacceptable to use budgetary funds to rescue bankrupt companies. It is unacceptable to increase the government’s direct or indirect control over the real sector of the economy. Irresponsible business owners and managers should be punished by having the encumbered shares of bankrupt Russian companies transferred to their creditors– independent from their citizenship or country of registration. Bankruptcy sales must be carried out in open and transparent auctions.

-Reducing government intervention in the financial sector. The reorganization of the financial regulatory system on the principles of competition and free enterprise.

-Reform of the monetary regulatory system. The Bank of Russia should maintain its aim of supporting the value of the ruble, even as it ceases the additional powers granted it under the “anti-crisis measures.” Regulation of banks should be transferred to a separate government body. [This would] eliminate the privileges given to commercial banks, which arise from the Bank of Russia’s joint function of “printing” rubles and regulating the banking system.

7. The Liberal Charter alliance marks that the result of the so-called “anti-crisis programs” proposed by authorities will be the deepening and widening of the financial crisis, and the transition of a short-term recession into an extended depression. Preserving mistakes made during an economic boom, continuing the policy of promoting risky loans, and the misuse of public resources for false purposes will inevitably lead to grave financial, economic and social consequences. Russia does not need to repeat mistakes made more than once by authorities in the US, the European Union and other countries.

The only guarantee of the Russian economy’s competitive edge and long-term success, and that of the whole Russian society– is the freedom of entrepreneurship by Russian citizens. [Further, the] government must respect property rights and carry out responsible, consistent and ethical economic policies.


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FSU and Baltic News on Russia

ESTONIA

Local media sources point out that both Tallinn’s anti-Russian rhetoric and Moscow’s response are highly damaging to bilateral economic contacts.

“Russia has declined proposals of many Estonian entrepreneurs wishing to implement joint business projects. Every time a business leader has a major idea about doing business with Russia, they start hissing in his ear: Estonia must abandon its Russo-phobic policy in favor of a friendly one. Estonia would only benefit if its hostile slogans were replaced with more creative ones. Otherwise, Estonia will only be left with two conflicting options, both unproductive: either sell itself to Russia, or unleash a pointless war, like [Georgian President Mikheil] Saakashvili.” (Erileht, October 15)

Analysts believe that the fear of potential Russian aggression against Estonia has led to an excessive militarization of the country.

“Estonia is trying to arm itself. It wants to purchase 40 tanks and invest 60 billion EEK in defense over the next decade. And we have chosen a perfect time, too. Russia is our largest, and only, adversary. Estonia must arm itself to be able to withstand an invasion until NATO forces arrive. However, this massive armament campaign leaves the impression that Estonia is a highly militarized country. Even if we take a small portion of the 60 billion and spend it on education and healthcare, and reduce anti-Russia rhetoric, it would do us much more good than tanks.” (Ohtuleht, October 17)

Commentators claim that Moscow is capable of using capital for political ends.

“The financial market turmoil has forced Iceland’s government to ask Moscow for a loan. It has long been known that nowadays, countries are conquered by money, not tanks. We can only hope that Iceland will prevent Russians from including ambiguous, open-ended clauses, or insisting on political support for Moscow’s policies instead of loan interest. Business is business, even when done by Russia. Although Iceland cannot be bought for 60 billion kronas, this amount may be enough to make it dependent on Russia.” (Ohtuleht, October 16)

LATVIA

Russian-language media sources indignantly condemn officials in Riga for their anti-Russian stance, which, they argue, prevents Latvia’s mutually beneficial cooperation with former Soviet republics in Central Asia.

“Central Asia opens incredible prospects for Latvia. However, to embrace those prospects, we’ll first need to befriend Russia, but our government is doing its utmost to spoil relations with our eastern neighbor… It isn’t clear why [President Valdis] Zatlers chose to criticize Russia with such impertinence [during his visit to the region]. Does he really think he can get away with this sort of behavior in Central Asian countries, which are all long-standing and faithful partners of Moscow?” (Vesti Segodnya, October 16)

LITHUANIA

Some writers believe that during the financial crisis, Moscow will definitely take advantage of Iceland’s request for a 4 billion euro loan.

“It is strange that Russia, which is itself suffering from the crisis, would be the first to offer help to this small country. Moscow makes no secret of the fact that its help will not be selfless. Moscow will try to occupy a NATO base in Iceland that was abandoned in 2006, and Russia is also interested in Keflavik International Airport, which was closed after American troops left the base. Russia sees Iceland as a good springboard for its further expansion into the Arctic region. Presence in Iceland would allow Moscow to compete for Arctic oil and gas more effectively. Experts say that the Arctic has a one-fourth of the global oil and gas reserves. By helping Iceland, Russia mocks at solidarity declared by the West and NATO, and says: ‘We have been acting aggressively toward Georgia, but at the same time we are extending a helping hand to a NATO member-country.’ This means that the West has lost again - maybe not the war, but a small battle for influence in the modern world.” (Runet.lt, October 19)

BELARUS

Opposition media laughed at Alexander Lukashenko’s speech at a meeting of the National Security Council, where he emotionally spoke about the possibility of a NATO attack on Minsk.

“Lukashenko’s speech…could have been a good screenplay for an apocalyptical thriller. The world is on the brink of catastrophe, all countries are preparing weapons of mass destruction, NATO stands at the Belarusian border, and what is most important - the Union State of Russia and Belarus is under threat. The enemy, of course, is creeping from the West. The Apocalypse is near. According to Lukashenko, ‘the growing role of Moscow on the international scene was one of the things that irritated the West.’ To give battle to the enemy, Lukashenko considers it necessary to discuss ‘Russia’s offer to create a united air defense system against the West.’ We are lucky to have a leader who can oppose this all-powerful evil.” (”Solidarnost,” October 16).

Political scientists are discussing a thaw in relations between Minsk and the European Union. However, most remain skeptical about a possible alliance with Europe, recalling the experience of the Union State of Russia and Belarus.

“We need investments and technologies, we need western support in the fight against Russian pressure. We became expert in marking time during the ‘brotherly integration with Russia.’ There were certain ‘road maps,’ for example, for adopting a common currency. But in the meantime, Minsk was milking Moscow while feeding it a rhetoric of unity. You can be sure, Brussels will experience this, too. Belarus will not push Europe away, but turn the formal Euro-integration into something like a viscous joint project with Russia. Europe needs to establish a safe cordon against unpredictable Russia. After this, things will change for the better, European strategists think.” (”Belorusskie Novosti,” October 16)

UKRAINE

The press traditionally writes about Prime Minister Yulia Tymoshenko’s dependence on Moscow. “They count on Tymoshenko. First of all, because she is considered to be the winner of the Ukrainian politic struggle, and it is very profitable to be a winner. Besides this, she can speak to the Russian leaders in their business language.” (”Segodnya,” October 17)

Political scientists connect Russia’s unexpected decision to subsidize Iceland’s economy with the Kremlin’s intention to attract a new exotic ally - a NATO member that opposes the bloc’s military initiatives.

“Iceland is one of the few European countries which keeps neutrality and adheres to the friendship policy toward all civilized countries, including Russia. Few people know that it closed NATO bases in Greenland and on its own territory, and de-facto abandoned the protectorship of pro-NATO countries. Of course, it would be absurd to say that the country’s economy was ruined intentionally as a punishment for its “peace dove” policy, but one cannot deny the political component of the financial crisis. Moscow not only rewards Reykjavik for the eviction of bases, but also hopes for a long-lasting friendship. Well, we shall live and see. It is said that Russian bases may appear in Venezuela, so why not in Greenland?” (”Kiyevsky Telegraf,” October 17)

MOLDOVA

Tiraspol’s media do not doubt that Russia is ready to defend Transdnestr from any political or economic outside interventions.

“In terms of selling its products in Europe, Transdnestr welcomes the involvement of the EU in such aspects of its life. As for issues related to the settling of differences between Tiraspol and Chisinau, it is clear that the deciding vote belongs to Moscow. During the standoff, Tiraspol has never shown any disagreement with Moscow’s views on ways of settling the conflict, as well as its interest in EU’s involvement in the settlement. It is unlikely that Moscow will react to Chisinau’s intention to take part in the “harsh politic and economic pressure on Tiraspol.” Moscow will most likely say that it welcomes joint actions, but only if the interests of people living in Transdnestr are taken into account, including Russian citizens.” (IA “Lenta PMR,” October 16).

Chisinau experts believe that President Vladimir Voronin will play the “Russian card” before the parliamentary election. “Voronin’s reconciliation with Moscow was made to let the ruling Communist party win the 2009 election with Moscow’s help. The Russian-speaking population of the Republic (one third of the whole population), which was disappointed with Voronin and his party’s policy, will face a choice - either not to vote at all, or support Voronin and his party. There are no other big leftist parties in Moldova, and the Russian-speaking electorate traditionally supports left-wing politicians.” (”Press-Obozrenie,” October 21)

ARMENIA

Local journalists write that Armenia is a pawn in the international political game.

“Russia is trying to restore its former influence, while the West is resisting Russia’s efforts. Russian President Dmitry Medvedev visited Armenia not only to promote bilateral relations, but also to strengthen Moscow’s stance in the regional struggle.” (Azg, October 21)

“After the Russian president’s visit, yet another American politician will come to the republic for routine ‘consultations’ with the Armenian president.” (ArmInfo, October 20)

Some publications think Russia will lose interest in Armenia as a political ally as soon as NATO becomes established in Georgia.

“Russia no longer needs Armenia; it has become a surplus territory now that [Moscow] has recognized Abkhazia and South Ossetia. Moscow is now bargaining with the West as a shareholder. The West has ceded Abkhazia and South Ossetia as payment for Armenia. Besides, Russia owns nearly everything in Armenia. In this sense, Armenia is the same as Bulgaria and Montenegro, where Russian capital is particularly broadly represented. In the 1990s, we received money from the West and security from the North, but now the situation is becoming the exact opposite.” (Eter, October 16)

GEORGIA

The Georgian media write that the military conflict has complicated the already unstable situation on the Russian market.

“The Russian economy has recently suffered considerable damage, although not only because of the events in Georgia. Even before the Russian aggression in Georgia, the Russian economy was moving towards a recession and demonstrated other negative trends, largely because of a sharp drop in global oil prices. Against that backdrop, the aggression in Georgia only served to aggravate the Russian economic crisis. Prices of Russian stock started falling, and investment inflow into the country slackened. Russia has sacrificed economic prosperity to attain military goals, but it miscalculated the economic consequences of the aggression.” (Biznesi, October 16)

AZERBAIJAN

Analysts doubt that the Nagorno Karabakh problem can be solved soon, as the intermediaries - the West and Russia - still need to convince the sides to consider a compromise.

“Like us, Armenians have pinned their hopes on Russia as a co-chair of the OSCE Minsk group. But Russia and the EU have their own interests. After the events in Georgia, Moscow does not want to become involved in a large-scale conflict with the West, which is possible over Karabakh. Europe, in the meantime, is not at all willing to move from one powder keg to another.” (Novoye Vremya, October 21)

Commentators believe that despite Moscow and Yerevan’s declarations on promoting mutually beneficial cooperation, Russia is pursuing a policy of tough economic expansion against its strategic ally.

“The reality of the situation bears little resemblance to cooperation. Moscow is controlling Armenia’s economy and is pursuing a policy of economic expansion against its outpost. The largest Russian companies - Gazprom, InterRAO, VTB, RusAl, VimpelCom, Sistema, RZD and Alrosa - control all the strategic assets in the Armenian economy.” (Express, October 21)

KAZAKHSTAN

Analysts believe that Russia, which is trying to compensate for its geopolitical losses after the collapse of the Soviet Union, needs to maintain the viability of the CIS and other post-Soviet integration organizations to ensure self-preservation.

“Relations within EurAsEC and among Central Asian countries are harmonious because this suits Russia, which has set the parameters for integration and is reuniting the CIS on the basis of economic pragmatism. Russia will not be an ideological center like the Soviet Union, but will take into account the interests of all member states. Russia is trying to grow stronger through economic integration; this is the lesson it has learned in the Caucasus. Alienation of Central Asian states, as was the case with Georgia, will result in total isolation of and a subsequent split within Russia.” (Delovaya Nedelya, October 17)

TAJIKISTAN

Analysts write that Tajikistan is an unwilling participant in the age-old struggle between the West and Russia for geopolitical influence in the region, with Moscow’s behavior in bilateral relations marked by extreme ambitiousness and egotism.

“Tajikistan has huge military-political and geopolitical importance for Russia. This means that the deployment of [military] bases is a ’sacred cow’ for Russia, just as the issue of labor migrants is a ’sacred cow’ for Tajikistan, and sacred cows are never sacrificed because of the potentially damaging effect on bilateral relations. Moscow and Dushanbe are aware of this, which is why the efforts of some political groups in Russia to force Tajikistan to take a stand in the ‘divorce’ of Russia and the U.S. seem odd, to put it mildly.” (FK Capital, October 8)


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