That was the right decision then. It was the move the US did not expect President Vladimir Putin to make. It was expected Putin would hold to his natural conservatism and keep the ruble trading in the 30’s versus the US dollar as opposed to risking a collapse in exchange rate in the face of an historic drop in oil prices over the eighteen months between July 2014 and the low made in late January 2016.

Oil dropped from $120+ per barrels to around $28 during that period. And if Putin hadn’t proactively allowed the ruble to fall from RUB32 to a high of RUB85 in early 2016 Russia would have been bankrupted completely.

During that time Bank of Russia President Elvira Nabullina raised the benchmark lending rate to 17.00% and Russia began the slow, painful process of de-dollarizing its economy.

It’s been five years since those dramatic times. But a lot of damage was done, not just to the Russian people and their savings but also to the mindset of those in charge at the Bank of Russia.

Nabullina has always been a controversial figure because she is western trained and because the banking system in Russia is still staffed by those who operate along IMF prescriptions on how to deal with crises.

But those IMF rules are there to protect the IMF making the loans to the troubled nation, not to assist the troubled nation actually recover. To explain this, I have to get a bit technical, so bear with me.

The fundamental problem is a miseducation about what interest rates are, and how they interact with inflation and capital flow. Because of this, the medicine for saving an economy in trouble is, more often than not, worse than the disease itself.

If Argentina’s fourth default in twenty years doesn’t prove that to you, nothing will.

Nabullina still believes that her job is to get inflation down to 4%. Inflation targeting, as central bank policy, is a disease that needs to be placed next to smallpox at the CDC in Atlanta.

It seems I have to write this article once every few months just to remind people what the problem is.

When inflation is above the target an austerity mindset dominates at the central bank who keeps interest rates above the market rate in the vain hope they can wring the last bits of inflation out of the economy, because sufficient confidence hasn’t returned to the banking system after the crisis.

This is Russia’s problem today. Nabullina still believes there’s work to be done before allowing the economy to grow.

When inflation is below the target, like in the ECB and the US, then to the miseducated central banker growth is sluggish and demands stimulus in the form of cheap money to create a virtuous credit cycle. It hasn’t worked and it won’t work.

Because both of these theories about the effects of inflation targeting are dead wrong.

They haven’t worked in the US and Europe because there is no more capacity within their economies to take on more debt to stimulate demand and increase spending. All they are doing is, as described by Mises and others, “pushing on a string” offering money no one wants at interest rates the market cannot sustain.

That cheap money inflates asset prices like stocks and bonds while diverting capital to long time-horizon projects like fracking in Texas, and housing and car loans, but it thieves working capital from the future by mispricing the risk of those projects in the form of the interest rate.

The net effect is enriching the already obscenely rich and powerful, through wealth transfer which feeds leftist and Marxist criticisms of the ‘free market’ while they proclaim the end of capitalism.

But central bank inflation targeting and control is the height of a centrally-planned economy. Control the value and cost of money and you control the means of production. So, capitalism this ain’t folks.

Miseducation on matters economic are commonplace today from the commanding heights to the lowest barrios.

Eventually, you reach the point we’ve arrived at in the west where no amount of forcing the market, through punitive negative rates, can stimulate growth. This is simply arrogant men praying at the altar of math torturing equations which have no resemblance to reality and turning it into policy.

On the other hand, we have Nabullina trained in this world of econometrics and its econo-babble, holding back the Russian economy with interest rates set above the market. She is either overly-cautious, if I’m being generous, or a full on fifth-columnist stifling growth to support Russia’s enemies, if I’m being cynical.

I think the truth lies somewhere in the middle, if I’m being fair. Today I’ll be fair.

The Russian economy, structurally, is in excellent shape. John Hellevig at the Awara group recently published an excellent report explaining the guts of what’s going on there. And John notes, like I have been for more than a year (here and here), that the Bank of Russia has interest rates too high given what the market is telling it.

It’s not that tough really, just look at the Russian yield curve and you can see what I’m talking about.

The current benchmark rate in Russia is 7.25%, down from 7.75% just two months ago (and that I’ll get to in a minute). The entire interbank market and short-term deposit market is trading below that benchmark rate.

This means the central bank is holding back a market that wants to trade at lower rates. This is keeping liquidity low and access to loans in the domestic and commercial market low as well.

Meanwhile, the demand for Russian debt, because as a country Russia’s balance sheet is so clean, in part due to Nabullina’s stewardship of the 2014-16 crisis period, is pushing rates lower. And for the first time in close to 5 years Russia has a normal positively-sloping yield curve from 1 year to 20 years, with no humps or flat spots.

Demand for Russian debt is finally market driven in a way that is predictable and can allow banks to make money paying short and lending long. This is how banks are supposed to make their money, not speculating on stocks and currencies!

Moreover, domestic savings rates at all maturities in the CD and money markets are below the benchmark rate, so Russian banks are under zero stress. High savings offer rates indicate a need to shore up reserves by attracting savings. It’s a bad sign.

Non-performing mortgage loans stand at less than 1%…. 1% !!

The only worry is the outstanding dollar-denominated debt, but that makes up around 1% of the total Russian mortgage market. It’s literally chump change.

I mean, for pity’s sake, what on god’s green earth is Nabullina waiting for? An engraved invitation from the Fed to the next convocation at Jackson Hole? She’s done her job, now let the Russian people do theirs.

Nabullina has kept rates high out of fear of inflation returning due to a rising US dollar and falling oil prices which is putting upward pressure on the ruble. She made an egregious policy error hiking rates in response to Trump’s crazy aluminum tariffs last year. And then held that level until June.

She’s only now just beginning to lower rates after the policy became ludicrous and Russian GDP growth has stalled. Again, incompetence and treason look very similar from a distance.

She keeps jumping at the shadows of a dollar-induced crisis. But the Russian economy of 2019 is not the Russian economy of 2015. Dollar lending has all but evaporated and the major source of demand for dollars domestically are legacy corporate loans not converted to rubles or euros.

So, the Russian economy is so much more insulated from a rise in the dollar than it was before.

The fundamental flaw in the thinking behind most central bankers, especially those trained by the IMF, is that lowering the cost of money stimulates growth and raising it reins it in. It’s an overly simplistic model to explain why we need philosopher kings like Nabullina, Mario Draghi and Jerome Powell to tinker with the economy and engineer growth and stability.

The reality is it’s more complicated than that, because access to capital means different things at different parts of the business cycle to different economies. And Russia’s role in the global economy is changing.

Russia is becoming an independent node in the global economy. Shut out of the US dollar markets, Russia now has to lead the part of the world it dominates – the EAEU, Turkey, Iran, the CSTO states – and show confidence by making the ruble more accessible to foreign investment.

Projecting confidence comes in the form of lowering rates to reflect a healthy domestic market, not keeping rates high because you’re afraid of the US

That yield curve I posted above is a picture of a central bank scared of the future, like Jerome Powell at the Fed, and not one sanguine about Russia’s future prospects. Powell has problems Nabullina doesn’t have, like hundreds of trillions in unfunded future liabilities that require much higher rates to stabilize.

Lowering interest rates in Russia from 7.25% to 6.5% or even 6% is likely all she needs to do and then let the markets take care of things from there. That’s what the market’s actually telling her.

And I believe Vladimir Putin has had enough of Nabullina’s fears. He’s getting more and more impatient with his central bank president. He sees the lack of growth of the Russian economy and wonders why capital formation is locked up behind a wall of overly-high interest rates.

Recently Putin sat down with Nabullina and right after that interest rates dropped 0.25%. The same thing happened in 2015 when she had rates stuck at 10% and Putin had to finally forced her to justify herself.

It’s clear that there is something wrong at the Bank of Russia; whether it’s Nabullina herself, her staff or the legacy of insipid and dangerous Western economic theories refusing to die, is beyond my knowledge.

The cynic in me says the foot-dragging by the Bank of Russia is the final vestige of US infiltration in Russia’s institutions rearing its ugly head. That fight is ongoing, but the recent drops in the benchmark rate are a good start.

The de-dollarization process is in full swing. It was big news last month when the world found out that Russia’s US securities holdings had plunged from $96 billion to $48.7. On July 18, it was reported that Moscow had done it again, once more selling off 70% of its US treasuries, leaving it with only $14.9 billion of that $48.7.

Sanctions and trade wars? Yes, the US use of punitive measures as tools of foreign policy prompted the move, but that wasn’t the only motive. This is a part of deliberate, long-term policy to put Russia in a strong position globally, taking advantage of the country’s negligible amount of international debt and the availability of its sizable gold reserves.

Moscow is steering a course away from the dollar in order to diversify its reserves and boost its economic independence. It has been building up its gold reserves for the last 11 years. Gold is rightly seen as a safe haven that will protect the country against any fluctuations and instability.

In 2017, the Russian Central Bank more than doubled the pace of its gold purchases, bringing its fraction to over 17 percent, making Russia the world leader in its quest to stockpile the precious metal. In May, 2018 the Bank of Russia’s gold holdings rose by 1% in May to 62 million troy ounces valued at $80.5 billion. This year, Russia surpassed China to become one of the world’s five leading holders of gold, with reserves topping 1,900 tons. All in all, the Russian gold cache has grown by more than 500% since 2000.

The country is also the third-largest gold producer. During the last ten years, it has mined more than 2,000 tons of gold. Annual production is expected to rise by 400 tons by 2030.

Another way to protect itself from the ubiquitous dollar is by using other currencies to pay its bills. Moscow and Beijing have constructed a non-dollar payment system. China can buy Russian oil with the yuan, its national currency, which Russia can trade for gold on the Shanghai exchange.

Analysts from the Bank of America (BofA) Corp. believe that the global stock market is in for a crisis that will echo the events of 1997-1998. Bloomberg cites the BofA’s strategists, led by Michael Hartnett, who wrote in a recent note that “US decoupling, flattening yield curve, collapsing EM — all echoes of 20 years ago.” IMF Managing Director Christine Lagarde holds the same opinion, stating, "The clouds on the horizon … are getting darker by the day." She believes that "[t]he biggest and darkest cloud that we see is the deterioration in confidence that is prompted by [the] attempt to challenge the way in which trade has been conducted, in which relationships have been handled and the way in which multilateral organizations have been operating," obviously referring to the United States. George Soros, the US financier and business magnate, also thinks a major financial crisis is brewing, triggered by a surging dollar and the capital flight from emerging markets. Addressing the German parliament in early July, German Chancellor Angela Merkel raised the specter of a financial crisis provoked by US-launched trade wars.

It looks like the US economy has been cursed to relive a crisis every ten years, thus negatively affecting the whole world. Back in 1997-1998, Russia took a hard hit, but it learned its lessons and took steps to prepare for contingencies in advance. There seems to be some wisdom behind Russia’s policy. Others would do well to take a leaf from Russia’s book. Christine Lagarde has described the financial situation in Russia as “good news.” In her remarks at the St. Petersburg International Economic Forum in May, she praised Russia for “admirable macroeconomic framework—saving for a rainy day, letting the exchange rate float, introducing inflation targeting, and shoring up the banking system.” The country has virtually no fiscal deficit, a solid current account balance, and very little debt.

Indeed, Russia has a thick cushion that will protect the country in times of trouble, with gold reserves that have grown to $461 billion.

In the past, crises were accompanied by a drop in oil prices. This time it’s different. The picture in the energy markets is a favorable one for exporters. Oil prices are expected to be high enough to boost the Russian economy. This month, Morgan Stanley hiked its forecast for Brent crude prices up to $85 a barrel. According to the Bank of America Corp., oil prices could rally to $100 in 2019.

Russia has ensured that it is protected against economic trials and tribulations, financial crises, punitive measures, and other menaces. This does not mean it will not be affected at all, but it is in a much stronger position than the US and the EU — the ones who wanted to cripple its economy with sanctions and failed. Like it or not, one should give the devil his due — the Russian government and the Central Bank have shown themselves in the past to be masters of the art of making the country stand on its own two feet, well prepared to face the future.

Judging from statements made by G-7 leaders at the recent meeting, President Trump’s application of US sanctions to Europe and disregard of European interests, just as Washington dismisses every country’s interests except Israel’s, has not caused Europeans to disassociate from Washington’s hostility to Russia.

The prime minister of England said that the G7 “agreed to stand ready to take further restrictive measures against Russia if necessary.” The American puppet in France, Macron, falsely accused Russia, the only country trying to enforce the Minsk agreement, of violating the Minsk agreement. The French president also falsely accused Russia of invading Ukraine and annexing Crimea, despite the fact that Russian forces have been present in Crimea for years under a 50-year lease that provides Crimea as a Russian naval base. As the French president surely knows, all Russia did was to accept an unanimous vote of Crimeans to return to Russia. Crimea had been a part of Russia for three centuries, longer than the existence of the US, before it was illegally transferred to Ukraine.

The G7 politicians accused Putin of “destabilizing behavior,” of “undermining democratic systems,” and of “supporting Syria.”

Europe remains subservient to Washington despite everything Trump has done to humiliate Washington’s European vassals.

Putin’s response to what he called “creative babbling” was that Europe should get to work with Russia working out their common interest.

There are common interests, and Putin sees them, but, as the G7 statements make clear, the G7 sees only a Russian enemy.

From the West’s standpoint Putin is a problem because of his insistance on Russian sovereignty. When the West accuses Russia of “destabilizing behavior,” the West is saying that it is Russia’s independence that is destabilizing Washington’s world order. Russia is regarded as a destabilizing entity, because Putin does not accept Washington’s hegemony. Putin cannot overcome this attitude toward Russia with concessions and reasonable behavior. It could be a mortal delusion for Russia to believe that soft words can turn away the wrath of spurned hegemony.

Putin accepts insults, provocations, deaths in Russian Ukraine, and Israeli attacks on Syria, a country he has spent resources liberating from Washington’s “rebels,” in order to demonstrate to Europeans that Russia is not a threat. Judging from the G7 or G6 statements, the European politicians simply don’t care that it is Washington and not Russia that is the threat. Washington has handed Europe a Russian script, and Europe seems to be going by the script regardless of how Russia behaves and how Washington treats Europe. Previous hopes that European opposition to Trump’s effort to destroy the Iranian nuclear agreement would result in Europe’s assertion of independence are dashed by the unified hostility to Russia displayed at the recent G-7 meeting.

Putin’s strategy might not work for two reasons. One is that Europe has not had an independent existence for 75 years. European countries do not know what it means to be a sovereign state. Without Washington European politicians feel lost, so they are likely to stick with Washington.

Putin’s other problem is his belief that Russia needs to be part of Europe. Americans reinforced this belief during the Yeltsin years. Russian economists and the Russian central bank actually believe that Russia cannot develop without Western participation. This makes Russia susceptible to destabilization by the Western financial empire. Foreign participation empowers Washington to manipulate the ruble and to drain the Russian economic surplus into debt service. To advance globalism, Washington works to discredit Russian politicians who favor a nationalist economic approach. Michael Hudson and I have described how, in effect, neoliberalized Russian economists are an American Fifth Column inside Russia.

Countries that open themselves to Western globalism lose control of their economic policy. The exchange values of their currencies and the prices of their bonds and commodities can be driven down by short-selling on futures markets. Remember, just one man—George Soros—was able to collapse the British pound. Today Washington can organize concerted action against currencies by coordinating attacks by the Federal Reserve, European Central Bank, Bank of England, and the Japanese central bank. Not even large countries such as China and Russia can withstand such an attack. It is remarkable that countries, such as Russia and China that wish to have independent policies rely on Western monetary and clearing mechanisms, thereby subjecting themselves to control by their enemies.

There is truth in the quote attributed to Mayer Amschel Rothschild: “Give me control of a nation’s money and I care not who makes it’s laws.” A professor at Oxford sent to me a copy of a letter he obtained from the Franklin D. Roosevelt Presidential Library written by President Roosevelt to Colonel House, dated November 21, 1933, in which Roosevelt writes:

“The real truth of the matter is, as you and I know, that a financial element in the larger centers has owned the Government ever since the days of Andrew Jackson—and I am not wholly excepting the Administration of W.W. The country is going through a repetition of Jackson’s fight with the Bank of the United States—only on a far bigger and broader basis.”

Being a reasonable and humane person, Vladimir Putin is focused on avoiding conflict. It takes patience for Putin to ignore insulting threats from militarily insignificant countries such as the UK, and Putin has the virtue of patience.

Nevertheless, patience can work against peace as well as for it. Putin’s patience tells Europeans that there is no cost to continuing hostile accusations and actions against Russia, and it encourages neoconservatives to employ more aggressive provocations and actions. Too much patience can result in Russia being backed into a corner.

The danger for Russia is that the desire to be part of the West results in concessions that encourage more provocations, and that the commitment to globalism undermines Russian economic sovereignty.

Russian hopes to unite with the West in a war against terrorism overlook that terrorism is the West’s weapon for destabilizing independent countries that do not accept a unipolar world.

Perhaps war would be less of a threat if Russia simply disengaged from the West and focused on integration with the East. Sooner or later Europe would come courting.

paulcraigroberts.org

Berke’s article reveals how the US intends to maintain and extend its hegemony by breaking up the alliance between Russia, Iran, and China, and by oil privatizations that result in countries losing control over their sovereignty to private oil companies that work closely with the US government.

Berke reports that Henry Kissinger has sold President Trump on a scheme to use the removal of Russian sanctions to pry President Putin away from the Russian alliance with Iran and China. Should Putin fall for such a scheme, it would be a fatal strategic blunder from which Russia could not recover. Yet, Putin will be pressured to make this blunder.

One pressure on Putin comes from the Atlanticist Integrationists who have a material stake in their connections to the West and who want Russia to be integrated into the Western world. Another pressure comes from the affront that sanctions represent to Russians. Removing this insult has become important to Russians even though the sanctions do Russia no material harm.

We agree with President Putin that the sanctions are in fact a benefit to Russia as they have moved Russia in self-sufficient directions and toward developing relationships with China and Asia. Moreover, the West with its hegemonic impulses uses economic relationships for control purposes. Trade with China and Asia does not pose the same threat to Russian independence.

Berke says that part of the deal being offered to Putin is «increased access to the huge European energy market, restored western financial credit, access to Western technology, and a seat at the global decision-making table, all of which Russia badly needs and wants». Sweetening the honey trap is official recognition of «Crimea as part of Russia».

Russia might want all of this, but it is nonsense that Russia needs any of it.

Crimea is part of Russia, as it has been for 300 years, and no one can do anything about it. What would it mean if Mexico did not recognize that Texas and California were part of the US? Nothing.

Europe has scant alternatives to Russian energy. 

Russia does not need Western technology. Indeed, its military technology is superior to that in the West.

And Russia most certainly does not need Western loans. Indeed, it would be an act of insanity to accept them.

It is a self-serving Western myth that Russia needs foreign loans. This myth is enshrined in neoliberal economics, which is a device for Western exploitation and control of other countries. Russia’s most dangerous threat is the country’s neoliberal economists.

The Russian central bank has convinced the Russian government that it would be inflationary to finance Russian development projects with the issuance of central bank credit. But when central bank credit is used to finance development projects, the supply of rubles increases but so does output from the projects. Thus, goods and services rise with the supply of rubles. When Russia borrows foreign currencies from abroad, the money supply also increases, but so does the foreign debt. Russia does not spend the foreign currencies on the project but puts them into its foreign exchange reserves. The central bank issues the same amount of rubles to pay the project’s bills as it would in the absence of the foreign loan. All the foreign loan does is to present Russia with an interest payment to a foreign creditor.

Foreign capital is not important to countries such as Russia and China. Both countries are perfectly capable of financing their own development. Indeed, China is the world’s largest creditor nation. Foreign loans are only important to countries who lack the internal resources for development and have to purchase the business know-how, technology, and resources abroad with foreign currencies that their exports are insufficient to bring in.

This is not the case with Russia, which has large endowments of resources and a trade surplus. China’s development was given a boost by US corporations that moved their production for the US market offshore in order to pocket the difference in labor and regulatory costs.

Neoliberals argue that Russia needs privatization in order to cover its budget deficit. Russia’s government debt is only 17 percent of Russian GDP. According to official measures, US federal debt is 104 percent of GDP, 6.1 times higher than in Russia. If US federal debt is measured in real corrected terms, US federal debt is 185 percent of US GDP. Clearly, if the massive debt of the US government is not a problem, the tiny debt of Russia is not a problem.

Berke’s article is part of the effort to scam Russia by convincing the Russian government that its prosperity depends on unfavorable deals with the West. As Russia’s neoliberal economists believe this, the scam has a chance of success.

Another delusion affecting the Russian government is the belief that privatization brings in capital. This delusion caused the Russian government to turn over 20 percent of its oil company to foreign ownership. The only thing Russia achieved by this strategic blunder was to deliver 20 percent of its oil profits into foreign hands. For a one-time payment, Russia gave away 20 percent of its oil profits in perpetuity.

To repeat ourselves, the greatest threat that Russia faces is not sanctions but the incompetence of its neoliberal economists who have been thoroughly brainwashed to serve US interests.

This article is co-authored by Michael HUDSON