Nina Kouprianova

February 25, 2009

At the end of January, Russia?s Prime Minister Vladimir Putin spoke at the World Economic Forum in Switzerland, where leaders gathered to discuss The Big Deal. He warned against excessive state intervention in the matters of economy by using the Soviet case as an exemplar. Soon, conservative North American blogs exploded: could a former, gasp, ?Comrade Commie Scum,? really be so reformed? Perhaps, the act of flogging a very dead horse by publicly acknowledging Soviet economic mismanagement matters on a certain symbolic level. What matters more is the relationship between political rhetoric and reality.

Certain economists believe that Russia?s government policies have noticeably worsened that country?s situation. In Europe and North America, countercyclical government regulation is meant to control overheating during economic upturns, while monetary and budgetary stimulation is used during downturns.

For this reason, economic crises have been fairly predictable. By contrast, the Russian monetary policy stimulated economic overheating during the upturn so rigorously, that the government had to invent a stabilization fund in order to balance the federal budget.

During the current downturn, however, the monetary policy has been toughened beyond all measure: the money supply has been falling. Yet, the budgetary policy has been relaxed beyond all measure. Q4-2008 spending exceeded that from a year ago by 18%, while the earnings were 21% lower (against the same benchmark). This policy led to a massive budget deficit (21% of the GDP in December, according to the Ministry of Finance).

What about the aforementioned state intervention? The Russian Federation owns the controlling block of shares in Gazprom. Yukos belongs to a government-owned company. The largest metallurgical holding in Russia is currently being forged under state control as well. State-owned banks are first in line for a bailout.

Furthermore, Russia?s biggest currency earner is not the banks or everyone?s most hated misnomer, the oligarchs, but … the federal budget?the humble taxpayer! According to the Ministry of Finance, the federal budget had earned approximately $18B in December and over $25B in January. A part of the budgetary reserves is kept in foreign currencies (USD, Euros, and BP). So, in January the federal budget had collected one and a half times the amount of the maximum unemployment benefits per taxpayer based on currency fluctuations!

The budget received these billions from the Central Bank of the Russian Federation, which, in turn, seems to have gotten them out of thin air. How could this scenario possibly become any more bizarre?

Russia?s federal budget then used these currency speculation earnings … to finance its own deficit.

Coincidentally, the Central Bank is not only known for such magic acts, but also its eloquence. This bank continues to refer to the ongoing devaluation of the rouble as the ?border expansion of the currency corridor.? If you had to read that one twice, my translation is not to blame.

Is it really a surprise that financial commentators like Alexey Mikhailov have been calling the status of Russia?s economy ?bullshitflation??