Russia is now performing wisely as it tries to keep a balanced budget and avoid a major deficit. The incumbent authorities remember the lessons of the 1990s, when they had to resort to issuing public short-term obligations to keep the budget afloat, which predictably provoked the 1998 default.
A multimedia lecture titled “Russia’s Modern Financial and Lending System” was delivered
at Rossiya Segodnya
According to Mr. Dubinin, the national financial system is the lifeblood of any economy.
It has become an integral part of the global financial architecture in most countries. The very essence of modern globalization resides in the fact that the rules underlying transactions and cash flows are standardized as much as possible. This process has been unfolding over the past four decades. It’s based on U.S. time-tested and effective market standards.
Russia has been connecting to these global market mechanisms gradually since the 1990s. The European Union was its primary commercial and financial partner. Now, Russia is a typical Eastern European emerging market economy in a post-transition period from a planned economy. In the 1990s, Russia made a conscious choice in favor of an open economy. The ruble first became a partially convertible currency, transitioning into a fully convertible currency in 2006.
The process of Russia becoming part of the global financial system was not only technical, whereby it was connected to the global financial cash flow processing system, but also involved signing international agreements. The scope of information agreements is constantly expanding, and if this trend continues unabated, the very notion of a bank secret may be obsolete by 2017. This will allow the global financial system to become more transparent and dynamic, and will also protect it from criminals, particularly with regard to sponsoring international terrorism.
Mr. Dubinin said that innovative financial instruments are constantly emerging on the global market. A system of derivative financial instruments based on traditional underlying assets has emerged over the past 15 years.
Central banks are primary regulators of the financial and lending system in most countries. They came into being as state-run banks with two primary goals — to cover the losses incurred by the state and to concentrate financial resources to promote economic growth.
Modern central banks have gradually undergone transformation, as their functions, rights and role in the economy changed with every new crisis.
Russia’s Central Bank has become a genuine mega-regulator that coordinates not only the country's banking system, but also all its financial markets and their institutions, including non-public pension funds, insurance companies and stock exchanges.
Mr. Dubinin said that Russia is now performing wisely as it tries to keep a balanced budget and avoid a major deficit. The incumbent authorities remember the lessons of the 1990s, when they had to resort to issuing public short-term obligations to keep the budget afloat, which predictably provoked the 1998 default. In this context, the current crisis and the 2008−2009 crisis haven’t led to any serious consequences fallout.
Mr. Dubinin also spoke about the financial system’s competitiveness, which is largely defined by actual cash flows. If an economy attracts strong financial flows, it’s a good sign; if more capital leaves a country than comes in, it’s not such a good sign.
Inflation and deflation are the main nemeses of the Russian banking system and the economy in general. When inflation is high, any serious investment is unlikely to come to the country, as securing a return on investment is a challenge. Inflation invariably slows economic growth, especially given the low productivity in Russia. Deflation (falling consumer prices) can also deter potential investors due to the risk of their falling into a liquidity trap.
Inflation is a more relevant threat in today's Russia. Using monetary tools alone will not resolve this problem. Contracting the money supply is a necessity, but it is also an insufficient condition for fighting rising prices.
Mr. Dubinin believes that Russia's economic growth slowed in 2013, followed by foreign policy complications in 2014. The imposition of sanctions and counter-sanctions amid declining oil prices and the ensuing collapse of the ruble plunged the economy into a shock.
Major Russian banks and state corporations lost their access to refinancing on Western financial markets. Collapsing oil prices was quite a predictable scenario in this situation.
Overcoming the crisis is the primary objective of Russia’s economic policy today. However, the need to resume economic growth is also something to think about.
The key problem for Russia is to regain credibility and to attract long-term investment.
In addition, it is time to finally go ahead and implement overdue structural reforms in the economy and get rid of the country’s dependence on oil exports.
