Prism Interview: Glazyev Blames Government for Banking Crisis
In an interview with Prism August 28, one part of whichis reproduced below, Sergei Glazyev, the chairman of the Dumaeconomic policy committee, argues that failures in the Russiangovernment’s economic policies led to the current banking crisis.The remainder of Glazyev’s interview, which focused on Prime MinisterViktor Chernomyrdin’s 1996 draft state budget, will be publishednext week. This interview was conducted for Prism by YevgenyKrasnolobov, a correspondent for Moscow’s "Open Radio."
Prism: How would you assess the current crisis inthe banking system?
Glazyev: It is self-evident that this crisis was causedby the policy of the government itself. First of all, becausethe financial and credit policies which the government has adoptedin recent months have led to a sharpening of the non-paymentscrisis. The failure of firms to pay each other, the banks, andtheir workers is only getting worse. Sooner or later, this crisishad to affect the banks. And this has now happened. The currentsituation could have been avoided if the government had takena more considered approach to the problem of macroeconomic stabilizationand guided its actions by the real developments of the economy,and not the abstract models of the IMF.
For example, the planning of monetary and credit policy for 1995which was undertaken by IMF experts, and which both our CentralBank and the finance ministry responded to by agreeing to everything,ignored the following basic fact: at that time, almost half ofthe money in circulation in Russia was foreign currency. And allthe planners’ calculations were based only on the ruble half.As a result, when the ruble began to gain against the dollar,the Central Bank quickly exceeded IMF limits and this led to aspeculative run which made the situation even worse. Despite thefact that the Central Bank engaged in intervention by sellingrubles to the population, the amount of money in circulation fellsharply. To promote stabilization, the Central Bank would havehad to emit rubles precisely according to the amount of hard currencybeing bled out of the system. But it was impossible to do thatwithin IMF-imposed limits.
Moreover, the policy of promoting the strengthening of the rubleagainst the dollar has had the effect of making exports more expensiveand imports less so. The prices of goods produced domesticallyfor export rose 6-7 percent a month and became less competitive,while the prices of foreign goods produced for sale here fell1.5 percent a month and became more attractive to consumers. Asa result, production fell, incomes fell, and the payments crisisbecame worse. Enterprises which had been successfully exporting,such as the timber and machine-building sectors, were no longerable to pay their loans. Export of timber had been stable for300 years for Russia; it never entered anyone’s head that a stupidgovernment could make the sale of timber abroad unprofitable.But that is what has happened. And when these sectors could notmake payments on their loans, the banks were faced with a seriousliquidity crisis.
The government’s approach concerning the emission of bonds madethe situation worse. Competing with the market for capital, thegovernment has now attracted more than 15 trillion rubles to financethe budget deficit. The government has been willing to pay veryhigh rates of interest on short term obligations in order to attractthe money it needed. The banks found this profitable. They didnot stop to think where this money was coming from. Without anyrisk, they purchased government obligations on which the governmentwas prepared to pay 80-90 percent interest on an annual basis.But what was profitable for the banks was disastrous and harmfulfor the economy as a whole.
Eventually, however, the banks were caught by this cycle of financingand refinancing the government debt. In order to break out ofit, the Central Bank and the government adopted a traditionalapproach. They issued additional money in order to deal with theobligations that they had undertaken earlier. This step differedfrom past practice in that the budget paid 10 percent for theseemissions and now the federal budget is paying 90 percent forthem. Consequently, the Central Bank is trying to buy back asmany obligations as it can and sell them to private persons, lestthe entire attempt at stabilization collapse in a new round ofinflation.
Prism: What is your prediction about the futureof the Russian banking system?
Glazyev: Much will depend on the specific actions of thegovernment. Two weeks ago, I wrote Chernomyrdin and Central Bankacting chairman Paramonova to warn them about the possibilityof a new banking crisis and to suggest some remedies. In particular,I advocated a variety of means to increase exports. As part ofthat, I proposed a gradual and staged devaluation of the rubleto perhaps 7-8,000 rubles to the dollar by next year. The secondmeasure I advocated was the elimination of export duties on timberand machine tools. I don’t believe it is necessary to eliminateall export duties, but we must do it in areas which cease to beprofitable as a result of them. The oil and gas enterprises arestill profitable and can pay. And I urged the re-establishmentof tight control on the growth of prices for key consumer goodssuch as gas, which has increased in the last eight months by afactor of 10. In addition, I suggested several measures for tyingthe increase in the amount of rubles in circulation to the actuallevel of production.
Unfortunately, at the present time, all free capital is tied intothe servicing of the government’s budget deficit. It is stillnot too late to undertake many of the measures which I proposed.I am even told that Yeltsin intends to take several measures soonto improve the prospects for exports. On the whole, however, whatis most needed is a complex and agreed-upon program of actionby both the government and the Central Bank. Judging by the recentremarks of Deputy Premier Chubais, the government does not understandwhat has happened and does not understand what it must do in orderto correct what the government itself has caused. I am very skepticalabout their ability to change any time soon. But if they do notact quickly, a chain of bank bankruptcies could take place oralternatively a new explosion of inflation.
Prism: Does that mean that depositors should pulltheir funds out of the banks?
Glazyev: I would not want to pour oil on the fire. I donot think that the government will allow the banks to go bankruptbecause that would undermine the government itself. And the bankswill certainly not sit and do nothing. I think that they willsimply increase the money supply, and that will affect the populationmore than the depositors. In that event, we may seen monthly inflationagain increase to double-digits.