Viktor V. Ivanter
Why Aren’t We China?
AiF starts a series of publications on anti-crisis measures taken not only in Russia but also in the whole world. In this issue we have chosen China as a point of comparison. Like Russia, this is a vast, ambitious country and, what is important, like us it almost totally depends on export. What methods to combat the crisis suit us? We asked about it Alexander Nekipelov, Full Academy Member, Vice-President of RAS and other leading experts.
Since August 2008, when the first unfavorable implications of the world financial crisis came to be felt, the Russian government has been working in an emergency regime. Numerous measures aimed at normalizing the financial, economic and social situation in the country are taken, just now an Anti-Crisis Program has been adopted. However, the condition goes on worsening. So the question emerges: Is it an inevitable result of the crisis itself, which has not yet “reached the bottom”, or evidence of insufficient effectiveness of decisions being made? To answer the question it is useful to seek diversion, for the time being, from immediate problems and concentrate on shaping an integral, systemic conception of ongoing processes.
After liberalizing the currency market in 2005 the capital movement became free. It means we made ourselves vulnerable. First, because we could not properly monitor speculators who took away money from Russia. Second, because we lost the chance of controlling the number of loans received by national companies from abroad. As a result, when foreign investors began to take away their money from our economy to fill their “home financial gaps” it entailed pressure on the ruble exchange rate and problems in banking.
How to get out of this situation?
What did China do? The country supported small banks, lowered the refinancing rate (at which the Central Bank extends loans to commercial banks, which, in its turn, is the minimal rate to further lend these credits to enterprises, to the population, etc.) up to 6.6%. In our case, in contrast, it was raised to 13% and loans became too expensive. This produced bankruptcies of farmers and those who dreamed of buying a dwelling, be it by mortgage, refuse from the idea. That is why we should lower the rate. But how?
Our financial authorities try to use it as a certain counterbalance to the push of Russian business for changing out of rubles. Without any success, as we know.
A considerable portion of these billions of rubles allocated for supporting the financial sector was changed into currency and brought out of the country. Paradoxically, despite huge monetary injections, since last autumn money supply does not grow in the country but decreases. This could be called “the effect of Baron Muenchhausen’s horse”: from one side you pour into it but from the other side everything disappears.
Therefore, in my view, in vain do we still refuse from introducing currency restrictions. Why? I’ll give an explanation. It is not very usual to speak about the costs of anti-crisis measures taken in our country. In the course of six months only we have spent a third of our state reserve and published the information quietly and emotionless. For these $210 bln, 800 mln tons of oil could be bought! This is more than its 1.5 year-long production in our country! Imagine, more than one year and a half we have thrown into the furnace of the crisis during half a year only!
The major part of the sum was used to adjust the exchange rate, for the so called soft ruble depreciation. That is why this soft depreciation is far from being an inoffensive and gratuitous thing as it seems to be. Suffice it to remember the 1998 experience: the then head of the Central Bank, V.Gerashenko introduced a stable financial currency position for banks. It meant a bank could buy and sell currency but by the end of the day its volume at the bank account had to be equal to that in the morning. The measure would have made the currency exchange rate stable, that is, there would have been no capital flight. We have burnt our fingers with this “free capital movement” to the extent nobody expected us to! What is the use of going on doing it? Restricting capital export by juridical persons would be also useful. In addition, all these measures are painless for simple citizens and useful for the country: people would have invested into their own, not foreign economy. Afterwards the refinancing rate could also be lowered, which means, loans could be made accessible to the population and to production enterprises.
By the way, China finds itself in a much more serious situation than Russia. Because we depend, practically, only on raw export and China on the export of a very wide range of goods. Therefore, radical demand reduction is a big shock for the latter. But in China they try to maximally “patch the hole” in external demand on the account of growing domestic demand. Fantastically impressive is the fact their anti-crisis program implies construction of dwellings, roads (though special roads, which take only a day to transport vegetables from one end of the country to another, are already laid). Our government has not disregarded real economy either. But it makes the main emphasis on supporting system-generating enterprises. This “manual control”, first, cannot be overwhelming by definition. And, second, it cannot be efficient if you support an enterprise operating in the middle of the reproduction chain. You have lent it money. The enterprise has purchased the necessary means of production and produced goods. And then it turns out demand for them is failing. You have to either buy the goods yourself or admit you have spent the money for nothing.
Stimulating domestic demand
The Head of the Finance Ministry, A.Kudrin announced these days a second wave of the banking crisis is expecting us. It is connected with the fact that we lent money, which (unfortunately, as it turns out) had been carried abroad not in full, there was time enough to distribute a part of it among enterprises in form of loans. And now the loans will not be repaid since there is no demand for these enterprises’ products. What a paradox: we grant support but problems do not disappear. Where is the way out? To get demand kick-started along the entire production chain. Its organizer should be, logically, the state. It can, for instance, initiate construction of roads.
The downfall of external demand in the 4th quarter of the last year made slightly less than $40 bln. Could the state have compensated the fall? Yes, it could in case it would have reduced the funds withdrawn from exporting sectors and, thus, saved their opportunity to fully implement their production and investment programs, and financed the budgetary breach by the currency it had at its disposal. Ideally, the economy simply “wouldn’t have noticed” the declined external demand. There would have been no production downturn, non-payments wouldn’t have been accumulating, tax payments would have been transferred to the budget, no need to spend huge sums for unemployment benefits. Mind that $200 bln spent to adjust the ruble exchange rate would have been enough – other conditions being equal — till the end of the current year.
It may sound somewhat strange but our big social costs are connected with the fact that we do not manage very efficiently to retain jobs, promote economic operation. Since, in the end, it is precisely production the source of unemployment benefits, among other things. That is why this divergence cannot last long. If our production is falling at the same speed as it was the case in November to February, all beautiful words about maintaining social payments will lose their big sense – there will be simply not enough resources.
For example, V.Putin is right in calling Sochi an anti-crisis project. We need investment brands like this now. They will support economic life.
Let us make the picture of relationships clear
In China during the crisis, strict control is introduced over those people we call oligarchs. And what about our country?
Relations of rather specific nature have been established between big business and the bureaucrats, they are expressed not only in the immediateness of financial support offered but also in the fact that in good times they were given unofficial tasks: to be of a certain use to the country. This is our old-time “tradition”. Thus, informal relations got mixed with official ones, it is hard to make out now why things happened this way: because of you, the authorities or it just happened because somebody has done something! It is a complicated and far from easy problem – there are huge sections of the economy “standing” behind the oligarchs. If somebody of them is punished thousands of workers at his enterprises suffer. This knot has to be disentangled, too.
What else is different in China. Chinese producers have received a series of preferences. For example, since January 1, 2009 the list of options enterprises may use to make a part of their tax payments was enlarged. This will help business renovate production capacities and stimulate domestic demand for products. The preferential VAT rate for small businesses was dropped from 4-6% (for other enterprises, 17%) to 3%. In some cities tags to buy goods (in the first place household appliances) in certain supermarkets are distributed or are going to be distributed. Rural citizens are given subsidies of 10 to 13% of the value of goods (of national production, of course).
Do Not Drink, Work!
An adequate reaction of the entire society to what is happening is also an important precondition to overcome the crisis. Patriarch Kirill has formulated his message in a good way: Do not drink, work! And one more thing. Businessmen should forget about a 100% or even 50% profit and learn to work with a 15% profit. Economic growth begins in April already. We shall not fall lower than we have already. Forecasts of our Institute indicate GDR growth in 2009 will be about 3%, maybe even 5%.
This year’s RF budget envisages a downturn of 2%. This is right: it is dangerous to form a budget based on excessively optimistic forecasts. In addition, history shows we always work better in critical conditions when “the enemy is already near”.
The Main Thing Now Is To Recover Confidence between the U.S. and Russia
On the eve of the meeting between the Presidents of Russia and the U.S. American expert Toby Gati spoke to Interfax correspondent on problems most likely to be discussed by the heads of the states.
During President Bill Clinton administration Toby Gati developed US policy towards Russia, served as special assistant to Bill Clinton, senior director for Russia at the National Security Council. At present, she continues dealing with Russia as advisor to a big law firm. On the eve of the first meeting between the Presidents of Russia and the U.S. on April 1 in London, Toby Gati answered questions of Interfax correspondent in Washington, Pyotr Cheryomushkin.
Mrs. Gati, what agreements can be achieved during the forthcoming first meeting between the RF and U.S. Presidents?
The first meeting between the Presidents of the U.S. and Russia is always an opportunity to look ahead, not back. You know the old saying: the only thing more difficult to predict than the future is the past. Of course, it is important not to forget the past and why relations have ceased developing, but this cannot be the subject of the summit.
It is more important to understand at what point we are now and where we are heading. And consider problems requiring joint work of our countries not because they like each other, or agree on all issues, but because everything happening in the world is too complicated not to take each other into consideration. I think during the financial crisis declarations of the two leaders on global interdependence, interdependence of economy and our both countries inspire optimism.
During the summit Presidents of our countries will discuss strategic and other issues, which cause major concern in the U.S. and Russia. These are: arms control, Iran, and Afghanistan. I suppose both leaders will be interested to know the other country’s concept of its place in the world in the period of these big changes. It is easy to act according to stereotypes of what America is like or what it is not. For Russia, it is easy to continue its anti-American propaganda. Likewise, for the U.S. it is easy to form an image of Russia as a country of certain type. We have to rise above it and see how both leaders reacted on last year’s crisis and changes in their respective countries. For Russia, it might be easier because we, in the U.S., have a new President who has declared during the election campaign his policy would differ from that of the Bush administration. Russia pursues certain continuity but has also developed new views. I think both leaders will make use of these opportunities.
The new U.S. administration announced Afghanistan is one of its foreign policy priorities. What practical steps could Russia take, in your view, to help the West resolve the chaotic situation in Afghanistan? What steps could Russia take to remove Western concerns about Iran?
I’ll start with stating that internal problems require the administration’s special attention. I don’t think the country can have a strong foreign policy without a strong economy. In the 21st century this is impossible. It could have been this way in the past but now, under conditions of comprehensive interdependence, only a strong economy can become the fundament for a strong foreign policy.
Russia assesses now realistically enough what has happened and may happen in the RF as a result of the world crisis. One has to concentrate on practical issues and the solution of problems. Besides, the question now is not ideological struggle but competition and cooperation between countries. As to Iran, it is an important problem for the U.S. It was and remains it. In this sense, the administration stands for continuity in evaluating what is going on in Iran. I presume Russia’s position has changed over the last couple of years. A certain consensus with the U.S. emerged as to the essence of the Iranian threat. Both sides agree Iran should not possess nuclear weapons. The difference lies in tactics that should be applied. I don’t think Russian policy planners completely exclude the possibility of Iran developing nuclear arms. Probably, this is not a topic to speak of in public but it is taken into consideration. The situation with Iran getting hold of nuclear arms may have serious implications not only for the U.S. but also for Russia. The question in discussion is not to what extent Russia can exert influence on Iran, but whether Russia will use her influence on Iran. Iran has its national interests, and nobody thinks it is easy for the country to change its line. But I suppose the wish to jointly examine and discuss ways of exerting influence on Iran might be a very positive sign. The wish of the new administration to use diplomacy seems to be a very positive sign.
The most important thing we can attain in bilateral relations with Russia is to restore confidence we need to solve many issues. Both sides have their apprehensions and lack trust as to whether the conversation and concerns expressed behind closed doors remain off the record, within their bilateral relations. It does not mean one side should accept the other’s proposition. And one shouldn’t think a new world has emerged with the new U.S. President. The approach of Obama administration implies in the course of negotiations positions of both sides can be influenced. It is open for negotiations and wants to listen to ideas from the Russian side. But it would like the Russian side not only object to the American side but also advance practical proposals. I suppose both sides will think not of what they can say during the press conference to look nice but what they can say to each other in the narrow circle and make the problems less difficult.
The Russian side feels disappointed that several steps towards the West, even as to NATO expansion, have not been taken into consideration. What could the American side do, in your view, to convince the Russian side there are no hostile intentions about Russia?
This is a difficult question. If Russia wishes to spend a couple of next years issuing bills of what has been wrong, it can, naturally, be done. But it will be of no use.
I think the Russian and the American sides should keep the past in mind but not use it as a threshold that cannot be crossed. If we wait till both sides are compensated for the insults of the past we’ll have to wait very long. And, frankly speaking, the rest of the world is not very interested in how we’ll strike the balance.
I understand Russia’s position that somebody has made use of her weakness, however, Russia, as we see her today, is already a different country. Sometimes the question arises: Does Russia really look upon herself as a different country? I am confident the majority of people in the U.S. wish to work with really existing Russia, not with some kind of phantom, which existed 20 years ago. The new administration wants to look at Russia with a fresh pair of eyes.
You were working for the U.S. administration in the 1990’s. In those times some people held our relations were strained. Nowadays, when all people are speaking of a reset, everybody tries to find his meaning of the notion. But it seems sometimes a relapse to Russia – U.S. relations at the time of Clinton administration could be a reset.
I don’t think history repeats. I don’t think either we can return to any previous pattern. By the way, it was Obama who was the first to use the term ‘reset’ in one of his interviews, and Vice-president repeated it in Munich. I assume the idea implies not to forget everything in the past, or start from zero, but rather identify the topical area, in which both sides need to optimally (or, at least normally) interact. It became clear that things went wrong, what ‘entered’ the policy, for example, the understanding of what should be done by both sides to defend their national interests, not always succeeded in practice so that both sides could feel more secure. A reset does not mean the two Presidents discuss, come to agreement and nothing happens. This is the Bush administration pattern. It shouldn’t be Clinton’s approach in Russian interpretation when we wanted Russia to make right steps and the right steps turned out to be what we wanted. I think neither of these patterns suits now because the world has changed. And problems became different. To say this or that period represents a pattern of relations means to get trapped. In my view, Obama’s victory is the victory of common sense and reinterpretation of U.S. real interests in the world. It is a realistic approach and, at the same time, recognition of key creed (it may be called idealism), which has always motivated (and continue to motivate) US foreign policy.
An opinion is advanced in expert circles the Americans will never stop and will always pressurize Russia. Is there anything left that prevents us from finding a common language? Might there be really a ‘values gap’?
You know, those who are similar never make friends. The idea that similar countries should be friends does not work. We have differing national experiences and are on different development stages.
The U.S. has long been leading in the world and perceived it as a norm. Russia had to adjust to the new status: a transition from leadership, which I would call negative, in times of the USSR, to the conditions of the new state. Only now has Russia designed her new security strategy as to what kind of country she wants to be and what foreign policy she seeks to pursue.
We are on different stages of development. I know the Russians don’t like to listen to what Mikhail Gorbachev says but he pronounced wise words: there has been time in Russia for ‘perestroika’, and now, maybe, America, too, needs a ‘perestroika’. Many of those people in the world who supported Obama hoped we realize the need for future changes. It does not mean America has become weaker, it means America should act differently. One of the biggest challenges our countries face is not to adopt the model in which we have to do only with strategic issues like arms control or regional problems. It would have been a very narrow approach for us to return not to Bush’s or Clinton’s but to prior times, to the model of Soviet-American relations. I am confident there are many people who would have felt very comfortable in these conditions. Yes, we can speak of arms control and Russia will feel equal to the U.S. because she possesses nuclear weapons. We can speak of non-proliferation and tell the rest of the world how it should behave. But it would have been a very narrow approach in terms of a long-range perspective. The only way of developing relations will be that envisaging many sections of our societies feel involved in bilateral relations. In the first place, economic relations are meant (whose potential is huge) as well as broader cooperation at the level of civil society.
What do you think about the prospects of Russia’s WTO entry?
I think it is very important for Russia to integrate the WTO. Not because Russia’s behavior will change overnight. One of Russian claims is that the country doesn’t want to live by American rules. WTO stipulates global rules, not American ones. It is highly important for Russia to become a part of global rules and standards. It would have been an important step forward for Russia.
I have never met a businessman who wouldn’t have wanted more concessions from a foreign competitor. The question is whether the Russians intend to observe the rules and concessions they have signed. In the end, the decision should be based not only on economic calculations, on the Russian side it should also be a political one. The American side will have to decide to what extent it is ready to make concessions to Russia. I don’t think the world economy will gain if Russia remains beyond the WTO.
What is your attitude to the idea of creating a new global currency?
The wish to introduce a new global currency was a reaction to dollar exchange rate fluctuations due to the economic downturn in the U.S. Dollar is and remains a global currency. The question is which other currencies can play the role during the reform of the global financial system.
Recently President of Kazakhstan Nazarbaev proposed his variant.
Many people have made proposals. It’s a sign that countries are concerned about the value of American securities. The problem is how to foster stability on world financial markets and expand the countries’ participation in renewing the rules of world economy.
You know, in Europe and Asia there are very many disturbing forecasts about the future of the U.S.
Yes, I have read many of them. I can only advise the analysts should stop being enthusiastic about science fiction and come back to earth.
You know, fantastic forecasts of the U.S. breaking up are as fantastic as forecasts of Russia’s disintegration. I don’t think it will help strengthen our relations if opinions of people are considered who not only forecast but hope for disintegration of the country whose partner they wish to be.
I have read all these articles. Probably they look amusing but sometimes they mirror the desire of some groups of people with wishful thinking. If the policy towards the U.S. proceeds from the assumption the country might break up into several parts there is little hope Russian policy towards the U.S. can be viable. If you want to be part of the political decision-making process you should be more realistic in your assumptions.
The views probably mirror concerns about the fate of Russia who had periods of decentralization in her history. We, in America, stimulate independence of regions and federal states. For example, California has its own rules in the education system or exhaust gas emission. And we appreciate it positively whereas in Russia the attempts of the regions to follow their own path are not always regarded favorably.
To what extent will the ‘spread of democracy’ issue, notably in Russia and the post-Soviet space, take an important place in the new administration’ policy?
Sometimes it so happens that we stick in disputes about the term ‘democracy’ and in what it means. I think it is more important to speak of the components of what we call ‘democracy’. It suggests not always simply elections but many other components. To understand democracy it is much more important to concentrate on notions like the rule of law, respect for human and property rights, social contribution of people to the life of society, development of civil society, and transparency of government bodies. These concepts are much simpler and easier to understand but, at the same time, they are elements which make society strong. We, Americans, have never had problems with supporting the concept of democracy. And our latest elections demonstrated clearly what democracy means under competitive conditions. The main idea is access to the media, accountability of candidates, role of independent judicial bodies able to reject decisions of the executive. To the Americans it is clear their system works.
Issues related to corruption and the rule of law raised by Russian leaders affect the topics most important to the Russians. The Russians themselves have to evaluate the given promises both in the press and by political actions. America cannot directly impact on Russia. However, American democratic traditions are of value for other countries.
It is Easy to Lose Confidence and Difficult to Recover It
When Toby Gati is speaking you have to listen to her attentively and think intensely about what she is speaking about. Toby Gati is a clever person and far from the last cog in Washington’s machine. She graduated with honors from Columbia university (of the Ivy League!), made a brilliant career and is safely “registered” in the foreign policy establishment of the superpower overseas. She is honest and open-minded, her interview is in close correspondence with what she told me in a private conversation in Washington two weeks ago. She has good and deep knowledge, an understanding of Russia which is rather rare in the U.S. All this makes her a privileged interlocutor.
Much of what Mrs. Gati said in her interview produces no objections on my side. I agree with her diagnosis of the current events: the main thing is to recover confidence between our countries. One has only to be fully aware of how difficult it is. The ditch of distrust between our peoples has been dug competently and during long.
Those who have done it have thriven in this regrettable enterprise. Here is a fresh testimony. A couple of days ago, on the eve of the first meeting between President Obama and President Medvedev, Izvestia polled their readers on the Internet to realize what they are awaiting from it. Nothing serious, as it turned out. Only 4% of those polled presumed it would produce a “reset” in our relations. More than 90% thought everything would be limited to a protocol handshake or a good supper. Meanwhile, this is not the least-informed and most anti-American-minded readership in our country.
Judging by the duration of the conversation (beyond the time limit previewed) between the two Presidents, the skeptics were wrong. Nevertheless, their estimates mirror the real condition of public conscience. In this issue there isn’t a big clearance between the elites and mass layers of the population. I am afraid a similar poll in the U.S. would have produced approximately the same results. In any case, not seldom had I to do in the U.S. with biased opinions about us.
How did it happen that we’ve come to this sort of life? Some 15 to 20 years ago it seemed an irreversible process of rapproachment between our countries started. Why (for the time being?) the U.S. – Russia partnership could not succeed, is a topic for a big and long conversation, which requires a real emotional and intellectual break-through from both sides. That is why I shall confine myself here only to those fragments of the overall picture which came up in Toby Gati’s interview.
I shall begin with the claims of the American side. Toby Gati justifiably stresses quasi-scientific forecasts of a near disintegration of the U.S., very easy made by some of our national analysts (unfortunately, Izvestia, a respectable newspaper, also paid its tribute to them), do not promote better relations between our countries. I can only say: serious researchers do not discuss prophecies like these, but they are not taken into consideration in real policy. These forecasts, however, undoubtedly poison a common citizen’s mind and hamper a meaningful dialogue at the level of our two countries’ civil societies.
Another slightly veiled reproach refers to the issue of democracy development in Russia. We have really to do very much in this area. And not in order to be to American partners’ liking. Simply because otherwise we shall not manage to preserve our country in the world of global 21st century competition. I can only note in brackets the U.S. have successfully developed and are developing relations also with much less democratic countries than modern Russia.
I can say more and pose the question of previous U.S. administrations’ responsibility for the present-day state of democratic institutions in Russia. This topic is also present in Toby Gati’s interview, however, behind the curtains. Paradoxically, it is nowadays much more substantially elaborated in the U.S. than in Russia. The question is what has been done wrong, particularly on the first stages of modern Russia’s making. Here, we cannot avoid speaking of the systematic support by the Clinton administration of the corrupt Yeltsin regime. In addition, in their worst manifestations like the break-up of the Parliament in 1993, profanity of 1996 Presidential elections, Chubais’ privatization, etc. What was it that inspired Russian policy creators in Washington in those times? A blind faith in the market placing everything right not only in Russian economy but also in policy? A shrewd idea that for the sake of American interests one can close his eyes at what is going on in Russia? The fear of “communist revanche”? These questions will haunt us until we, by joint efforts, find honest answers to them.
Much may be also said about American policy in the post-Soviet space where it often acquired a clear-cut anti-Russian orientation. I think suffices it to mention here the so called “colored revolutions”, particularly in Georgia and Ukraine.
Toby Gati is right in stating we should in no case be hostages of the past. And she is not less right in recognizing one shouldn’t forget the past and lessons should be learnt from it in order not to repeat the same errors in the future.
Now it is important to make a 100% use of “the window of opportunities” opened by the new and young people in the White House and the Kremlin. This requires a substantial re-evaluation and re-consideration both in Moscow and Washington. It is hard not to agree with Toby Gati stating: “It is highly important for Russia to become a part of global rules and standards. It would have been an important step forward for Russia.” The same may be said, with no less if no more reason about the U.S. as well. To maintain its leadership in the new phase of global world development the only superpower will have to master the difficult art of playing by global, not American standards.
And the last thing to be said. Toby Gati attaches great importance to the development of cooperation between our countries at the level of civil societies. True, the opening perspective of improving partnership relations between the United States and Russia is too important to fully entrust it to the politicians.