How Russia Can Escape the Financial Crisis

Liberal Charter, a Russian political alliance led by liberal economist Andrei Illarionov, writes a scathing statement against the Russian response to the financial crisis, and describes a pathway out of the crisis.

Andrei Illarionov is a former policy advisor to the Russian president, is now an opposition leader. The statement first appeared on his LiveJournal blog.

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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.

translation by theotherrussia.org