Understanding Russian Banking: Russian Banking System, Securities Markets, and Money Settlements - Softcover

Lapidus, Mikhail K.; Lapidus, Professor Mikhail K; Jickovich, Vladimir V; Golovin, Yur; Bukato,Viktor; Trittin, Paul S.; Lvov, Yuri I

Softcover

ISBN 10: 0964546426 ISBN 13: 9780964546424

Publisher: Mir House Inc, 1997

Synopsis

For years, consistent with its political and military policies, the American government has been feeding corporate America a line of malarkey about investing in Russia. To the extent convenient for its interests corporate America has been willing to listen, as long as the government GAVE them the money to make the investments with. Rare exceptions exist in oil and a few major industries. A few companies have sufficient money to 'buy" a foothold for the long term. It is not really an investment. It is an "ante' at the poker table, to have a seat. Russian bankers have realized this is not investment and that Russia cannot reconstruct its industrial output on the strength of these few billions. At the 1992 Yeltsin-Clinton Summit in Vancouver, during a discussion as to the amount that might be required, I suggested the figure $3 trillion dollars. president Yeltsin's response was. 'just about right".

The global corporate private business world knows well from market economy experience what it needs to conduct business in Russia and so do Russian bankers. Russian bankers have taken upon themselves the responsibility to act as catalysts in accomplishing this economic reconstruction. To do this Russian banks are undertaking the tasks of creating viable, reliable, dependable financial institutions to manage the currency of commerce which is the fertilizer of Russian economic life.

Both the Russian and U.S. government depend upon their populations for the financial support of the costs of government. The Russian banking industry understands that it is the people who support the government and not the governments that support the people. particularly in the United States it is the people who have the wealth upon which government is dependent for its survival. It is the banking industry's understanding that the essence of economic growth is to enable people to create and produce, that offers Russia its place in the the future global economy.

Russian banking is 'inventing' a new Russian social process for individual and small group entrepreneurial pioneering and providing people with new pathways for economic growth. Every decisive step in the history of economic development ha been the result of deliberate decisions to open up space and enable people to pioneer. This deliberate incubation of the free enterprise of ordinary people has always worked to produce great results. This is not nostalgic, not romantic, not greed. It is the simple principle of applying "opportunity" to the great driving hunger of millions of people to transcend their inadequate past

Many dwell on the negatives of this past which did exist. To proceed into the future, the Russian banking industry is finding and supporting the positive source of the strength of Russia: respect and enablement of the individual the "entrepreneurial' every-person, who collectively constitute "the unseen hand' of "the wealth of Russia", whose collective drive to transcend the past is the irreplaceable motive force of history.

Many in this generation have also written that the growth opportunity is gone forever. They would consign the Russian people to eternal political misery in grubbing over a perennially inadequate economic pie, which is constantly shrinking. far too "fashionable" are arguments that Russian resources are too limited, that Russian environment cannot handle rapid growth, and that most Russian must look forward to a diminishing quality of life in increasingly servile jobs. To these, the Russian banking industry says Humbug. These "reasoned arguments" are but the illusion of ignorance. Alignment with these arguments betrays the terrible struggle of Russian forebears to bequeath to Russia a world made more dignified for each and every individual.

The Russian banking industry believes that Russian resources are essentially unlimited and that for every obstacle there is a solution. It believes Russia has the capacity to re-entrepreneurialize all goods and services which have ever been made. In short it believes there are no arbitrary technical limits to Russian capacity for economic growth. Russian bankers believe it is true that they cannot grow the same way as in the past and that new ways must be found through which the limits of today can be transcended. Russian bankers believe that finding these ways is, in essence, the "job" of the Russian entrepreneur or, in its highest expression, the "profession" of the entrepreneur.

The task of Russian banking is to to design a coherent, integrated policy, a marketplace, if you will, for removing the barriers, all the barriers, to new venture formation, the principle one of which is trust.

Less than 30% of the population of Russia can presently make full use of its productive capabilities. The great entrepreneurial dilemma is reaching the point what sufficient tangible results have been created to interest formulae-oriented investment or loan capital. This in itself requires the Russian banking industry to act as spokesman for the Russian people in obtaining greater freedom, flexibility and logic in regulatory policies. As the Russian banking industry approaches the second decade of its participation in the development of a market economy it offers this description of its own pioneering efforts of the past decade. It is a blueprint motivated by hope and expectations which it dedicates to its customers, the Russian entrepreneur. Together they face the challenges of rebuilding Russia's economy.

About this title

From the Back Cover

Whenever any country runs a current account deficit it needs to finance it with a capital account "surplus" (i.e. inflow). If it has a current account surplus, it must have a corresponding capital account "deficit" (i.e. outflow). Comparing 1979-81 with 1985-88 West Germany's capital balance moved from an inflow of $8 billion to an outflow of $40 billion. Japan's from an inflow of $5 billion to an outflow of $75 billion, and America's from an outflow of $2 billion to an inflow of $129 billion. But this yardstick is hardly of any use: it is inaccurate and misleading. A balance of payments yardstick for capital flows gives a misleading impression because they show net rather then gross flows of capital. In 1980 total world bank cross border and foreign currency lending was $324 billion.

By 1991 it was $7.5 trillion. The combined GDP (Gross Domestic Product) of the 24 industrial countries in 1980 was $7.6 trillion; in 1991 it was $17.1 trillion. 1996 GDP of Russia was half a trillion. During the past ten years bank lending has risen from 4% of GDP (Gross Domestic Product) of these 24 nations to 44%. From 1970 to 1988 the ownership of American bonds by international investors increased from 7% to 17% and for Germany from 5% to 34%. Turnover in foreign exchange is now $900 billion each day. There are now 35,000 trans-national companies with 147,000 foreign affiliates. Finance has become totally global.

History shows that the countries whose governments do not involve themselves in business and have the fewest business regulations, attract the most investment. Russian budget "investments" are not investments at all but subsidies. Neither are Western government budget allocations investment. Real investment of privately owned capital creates economic development and there is no substitute for it. Elimination of regulation of business (Freedom) is what develops economies. Currency risk is the greatest deterrent to investment. In an international economic system of global integration, differences between interest rates precisely match the expected changes in the relevant exchange rates. If a one year dollar assets yields 5% and a one year Ruble asset yields 600%, investors must expect the dollar to appreciate 595% against the Ruble over the next 12 months. There is no longer any way for internal banking to avoid these global influences.

It is more difficult to steer economies using Monetary policy and fiscal policy now that capital flows freely in a global economy. Financial interdependence has neutered government economic policy makers. Monetarists believe that all you have to do to control inflation is control the supply of money. The "quantity equation" of monetarists says that the supply of money in circulation multiplied by the number of times it turns over in the economy each year must equal the price level, multiplied by the amount of output produced. Under these conditions slowing the growth of money will slow the growth of demand. The events of the 1980's have obliged us to disregard this theory. It has however been accepted that output is driven by supply-side factors and not by demand. For monetarism to succeed it must be possible for the government to control the supply of money and there must be a stable relationship between the amount of money and the amount of demand in the economy. Due to financial innovation and the expansion of global finance neither of these conditions was met in the big industrial economies in the 1980's. Raising interest rates no longer controls the money supply. Domestic interest rate policy is undermined in a global economy. Higher interest rates increase exchange rates. If governments chose to limit exchange rate fluctuation they cannot increase interest rates. The truth is that there is no longer any such thing as money in the historic sense. Charles Goodhart proclaimed the following law. "Any statistical regularity breaks down once pressure is placed upon it for control purposes". Governments change the way an economy works when they try to act upon it (control it). In a time of rapid innovation, expanding cross-border flows of capital, diminishing control through regulation, and the creation of new borders, the opportunities for statistical regularities to break down in unforeseen ways are multiplied many times over. Loosening fiscal policy (budget deficits) together with tightening monetary policies (currency exchange controls, higher taxes, business regulation) create high interest rates. Russian policy has driven $260 billion in flight capital out of Russia in the past five years negating the effect of all foreign investment.

International capital has played a big role in supplying the needs of the American government. America's account balance worsened from a surplus of $1 billion in 1980 to a deficit of $160 billion in 1987.- the mirror image of the country's inflows of capital. If capital controls had been in place, America would have had to finance its fiscal deficit domestically. That would have required interests rates to rise significantly. If the deficit had been financed by printing money, as Russia has done in 1991-1996, rising inflation would have resulted. Without open borders to capital and a free market economy absent of government regulation of business, interests rates, or exchange rates, the choice facing Russia is the same. Since Russia has limited borrowing credit abroad it cannot be irresponsible in spending or it will inflate the Ruble. That is a useful reminder. The ability to borrow money can be harmful to an economy. Russia can follow the example of Baltic currencies or those of The Ukraine.

The greatest opportunity for Russian economic recovery is to eliminate all rules and regulations and allow business the opportunity to expand GDP (Gross Domestic Product) and thereby pay more to the government at lower rates of taxation. This is the challenge facing the Russian banking industry in the 21st century. Such a monetary policy will permit the government to spend more of this revenue on social services and invest in expansion of future production by providing credit to industry at affordable interest rates. To survive through the transition period it will be necessary to substitute "compensatory finance" for the printing of currency and to concentrate on exports to earn foreign exchange with which to rebuild Russian industrial capacity and production. It is also necessary to repay debt by transferring ownership of industry in debt for equity swaps.

The market is self disciplining with punishment (bankruptcy) for failure. This is much preferred over government regulation by fiscal policy. Open capital markets let business men pass a vote of no confidence in the government by moving money abroad. Such exercise of discipline by the market over government is the best self correcting economic policy. The threat of capital flight is a powerful sanction on the government and assures efficiency. It vetos unaffordable programs and establishes priorities. It delays purchases until the purchase price can be earned by producing it. Is the market vicious, frightening and unfair? So far those Governments who live by it have survived and reached the highest standard of social services for their citizens. America, which has increased its capital inflow to compensate for its trade imbalance, is surviving on trust that it will not start the printing presses and inflate its currency, thereby settling its debts by inflating them away. America continues to attract capital because its creditors trust it not to inflate. Will Russia inflate? Currency appreciation continues to be a reward that investors expect to receive from investment at low interest rates. Does Russia have the courage to join the group of market economy nations. Do its leaders have the vision to take the people there by refusing to finance through printing money and rising inflation? That only Russia can answer. Thus far the answer has been wrong. The ruble has dropped to 5806 = $1.00 from R40 =$1.00 on 1990. But indications are that this course is being corrected.

The availability of overseas financing has altered the character of Russia's fiscal policy options. Budget-making is no longer simple. International flows of capital respond to changes in monetary policy and complicate the task of economic management by effecting the exchange rate. International flows of capital also respond to fiscal policy. The more open the Russian economy becomes, the more sensitive it will be to changes in interest and exchange rates. Unsurprisingly the result depends upon the government attitude towards exchange rates. Russian policy makers have to choose between monetary policy (strong under floating rates, ineffective under fixed) or fiscal policy (weak under floating rates, strong under fixed). Preferred monetary policy, chosen with domestic inflation in mind, most likely will not conform to the preferred exchange rate, chosen with international competitiveness in mind. Often the two will conflict and one will have to go. Frequently the exchange rate must go to where the interest rate sends it. The notion that the exchange rate can be used to preserve competitiveness, even as monetary policy is fighting inflation, belongs to an earlier era. - to a time when current account imbalances, not interest-rate differentials, drove currencies . The expansion of global finance has tied money policy and exchange-rate policy inextricably together. So much so that shifts in competitiveness (as expressed in changes in current account balances) now have no detectable effect on exchange rates at all. It will be some time before economic policy and the new global market for capital learn to get along.

A drive towards more tightly regulated domestic markets, if attempted, would fail because financial markets have knitted themselves together and it will take more than the wit of governments to separate them. The country that tries to regulate more tightly will find that it has delivered its financial industry into the hands of foreign competition. Governments must not themselves become a source of financial instability. Budget deficits must be kept small. Central banks must be allowed to go about their work unmolested.

So far Russia has never tried a real radical reform. It has not even tried a reform. What monetary policy has done is try to support its existence by taxing assets rather than income and by redistributing (transferring) money. The result have been the removal of the tolls of production from the hands of the population. Such a policy suffocates Russian business before it can even get started. The result will be the death of the goose that could lay the golden egg. The existing production of Russia is simply inadequate to give the total population a decent living. Production must be increased. Nothing can be gained by redistributing existing GDP or cannibalism of assets. Industry must have sufficient capital to function. If it does not, Government will drag down industry and they will both have to deal with economic disintegration. For production to occur, investment is required. For investment to occur, economic freedom to produce and retain a fair portion of the results of labor is necessary. There is no other way. Government investments are not investments. They are subsidies, obtained from producers and given to non-producers. Such government transfers cannot last. Such rules will keep capital far away from Russia. Look at Taiwan and what it has accomplished in 40 years without any natural resources. The greatest resource of Russia is not what is in the ground but what is in its people. The people will rescue the government if the government has the good sense to permit it.

Until such civilized norms are observed export license auctions will result in the export of flight capital, decent housing will be provided only to the rich, and international investors will include in their expectation of return on investment and assessment of risks, the cost of arbitrary blocks on their bank accounts, fixed currency exchange rates, printing press inflation, withdrawal of work permits, suddenly legislated increases in their costs, retroactive cancellation of tax moratoriums and incentives and potential imposition of back taxes. Such risks will be added to the cost of their contracts during negotiations.

Why is Russian labor worth more money outside Russia's borders then inside Russia? Why are Russians successful, optimistic, positive, creative, competitive, and even joyous outside their borders, where they miss their home land. They are the same people in both places. Why can't their energies be freed where they are, without a brain drain of the motherland? Why do Westerners, who are successful outside Russia fail inside Russia. They are the same. Could it be that at something within the borders is the problem? If it is not the Russian people, then what and who is it that is causing so much difficulty? It is the exploration of these questions that has become the function of the Russian banking industry as it enters the 21st Century and attempts to become the 'facilitator" for Russian industry and the GDP.

No discussion of banking, which is the processing of money, which is the tool of economics, which is the study of man's exercise of his creative ability, would be complete without mention of the source of this ability to create, The Creator.

God's laws are forever unchanging and can be known to his creations through communication with him. It takes a lot of faith to be an atheist but for those with such faith the chaos around us simply is. For those who prefer a more optimistic alternative by which to be guided, God offers consulting services.

It is quite clear that the responsibility for poor government is the responsibility of the people that elect it. If incompetent officials were not tolerated they would be replaced. There is an old saying. "People get the kind of government they deserve". The person placed in the post of an official can be changed every week, but nothing will change until people find their beliefs and place people in office who share their morality, spiritual philosophy, and logic, and who will implement policies friendly to the population and conducive to their economic productivity.

We have not learned or remembered that power cannot be taken. It must be given. We have lost our identity and forgotten whom we really are.

Two thousand years ago we were reminded who we are. Since then, with all the mental work we have engaged to make this a better world, the results can be likened to pouring water into a swollen river. The solution lies in giving up our mortal sense of existence and acknowledging that "I of myself can do nothing". The secret to success lies in rediscovering our oneness with God. The absence of that word in any economic plans is a real clue to the reason for poor results. Taken in the context of whom we really are, we have all the answers. The solution could start tomorrow. We have the free will to procrastinate or to remember whom we ARE. The Master within us all is perfectly aware of what is to be done. and by keeping our minds focused on the Presence, Spirit will work through our awareness to accomplish everything easily, effortlessly and creatively. We have no cause to worry.

The U.S. dollar has inscribed upon it "In God We Trust" What better time to reaffirm that we indeed do..

S uvajheniem i nailuchshimi pozhelaniyami.

About the Author

Dr. van de Waal-Palms, a delegate to the Yeltsin-Clinton Summit and participant in the New York Stock Exchange board-room meetings with CEO's of America's leading industries and Russia's Prime Minister, began teaching market economics at the Moscow Business School and Leningrad management School in 1989, later teaching at the Russian Academy of Science. He is President of the international investment banking firm Palms & Company, Inc. (1934-1997) which was the first American corporation licensed by the USSR government to operate in the USSR.

Edition details

• Publisher: Mir House Inc
• Publication date: 1997
• ISBN 10: 0964546426
• ISBN 13: 9780964546424
• Binding: Mass Market Paperback
• Language: English
• Edition number: 1
• Number of pages: 300
• Editor: Corbin Michael D.