Why Russia will follow America ? (Austrian analysis)

1. Why Russia will follow America ?(Austrian analysis) Dr Nikolay Nenovsky Instituto Bruno Leoni, Mises Seminar, 3- 5 October, 2008

2. Why Russia will follow USA? • Crisis + = dangerous combination ? Evgeny Yasin deep crisis in 2010 (Expert, September 2008) • The first capitalist crisis in Russia since end of XIX centuries (no Great Depression) • 1998 crisis of transition • Applying Austrian cycle theory to Russian situation

3. Austrian cycle and crisis theory 1 Basic lessons (Mises, 1912, 1924): • Money is not capital • Money is not Investment • Money is only Medium of exchange • The only safe basis for K, I and Y is the real saving • Money and lending can not generate Y • Discretionary and volatile monetary policy is dangerous

4. Austrian cycle and crisis theory 2 • New monetary injection, decrease the market interest rate below its natural level, raise liquidity and deform all patterns of consumption, saving and investments • Over-investment and mal-investments are observed • The crisis technically start when MP stance changes: i < i* to i < i*

5. Austrian cycle and crisis theory 3 • Hayekian triangle (Garrisons' Version) • In the case of i < i*, the triangle became longer and the middle is underdeveloped (machines), overdeveloped are LT investment (new business) and business close to consumption

6. Austrian cycle and crisis theory 4 Garrison’s model (i < i*, + later preferences adjustment)

7. Russia: facts 1 • Monetary creation (oil driven), low interests rate, over and mal investment • After 1998 crisis monetary stance changed from strict to laxity… • Credit, mortgagee and stock market booms, corporate external and internal debt raise (90% in 2010 – 140% of GDP, 150% F), 80 % of the debt 15 corporations… • Lack of competition at the banking system (3-5 state banks); the energy sector (Gazprom) • Deposit over insurance • Very sophisticated stock market (repo: stock as collateral – unique in Russia – matrioshka: pyramided repo)

8. Putin plan of rescue (injecting money, nationalization etc.), using National Welfare Fund (part of Stabilization Fund) 2 injections: 5% (+ 5%) of GDP to 3 banks Sberbank, VTB and Gazprom bank; fiscal reserve and stab-fund BoR: cut RR (18/09, after raising in 1/09 !!) + cut discount interest rate Agency for Mortgage Credit (AMHL): public money to refinance 500 regional commercial banks loans to consumers (similar to Fannie and Freddie) 5 big banks – 75 % of mortgage lending (50% in 2006) Massive injection from BoR and MoF at the Repo market (3 banks) Russia: facts 2

9. Russia: facts • Bank consolidations: VEkB took Sviazbank (Post); Vneshtorbank took KIT Finance; Renesans Kapital • ACB (Deposit insurance corporation) • Premium was cut by 23 %, the coverage doubled • (from 11 000 E to 20 000 E) • 98 % of deposits are covered And : • Foreign reserve decline (16 bln E) • Investments activity decline 3-4 % monthly • Foreign Investments leave • Putin, Medvedev proposition of gold market liberalization • JPMorgan took Washington Mutual, the same day Anatoly Chubais was appointed member of JPM Board?

10. Russia (after 1998): Overinvestment and rising Investment/Consumption ratio • Russia – remember industrialization (Stalin)

11. Russia: private saving and investments 1

12. Russia: private saving and investments 2

13. Russia: higher producer price volatility

14. Russia: Structure of Investments • January 2008 • 50-70 % • of the machines and • equipment • are totally amortized

15. Russia: exogenous shock and oil dependence • Monetary creation + constant saving preferences • Oil price and stock market dynamics

16. Russia: International Reserve Accumulation

17. Russia: external corporate debt raise

18. Russia: discretionary monetary policy • Low interest rate

19. Russia: discretionary monetary policy • Interest rate and Inflation: saving is discouraged…

20. Russia: discretionary monetary policySaving and Money

21. Russia: discretionary monetary policymoney and credit

22. Russia: mortgage market • INDICES OF RESIDENTIAL BUILDINGS COMMISSIONING(1990=100)

23. Russia: mortgage market

24. Russia: moral hazard and lack of competition • Banking sector, deposit insurance, state protection, crony entities etc. • Energy sector – the case of Gazprom

25. 7-8% of GDP 12-14 % of industrial production 16-18% of total export 45 % of Russian energy production, 85 % gas EU dependence 60-75% 5 world largest capitalization 5% of world energy production Russia: Gazprom (Nemcov and Milov report ‘’Putin and Gazprom”, 09/2008

26. Russia: Gazprom • Monopoly and subsides • Biggest corporation, but miserable tax receipts (comparing to the other energy producers), huge external debt… • Huge long term I (pipeline Blue, Nord, South stream, China, Yamal peninsula) without perspective and decline of gas production, I in gas extraction and equipments … • 30 September Gazprom Board meeting • Approved the incentives bonuses for almost 1000 officials • Cooperation with Venezuela and Bolivia • Extreme raise of consolidated debt (debt/earning before tax) from 1.1 to 1.7 just for one year (normal value for EM 1) • Improving equipment and services

27. Conclusions • Monetary driven boom (oil) + Lake of competition + State guarantee, moral hazard + Cronism and group pf interests = Crisis + ? dictatorship • Idea: power triangle dynamics is in reverse relationship with investment triangle dynamics ….developing the chain of causality … • Cycle (20 years)