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Page added on December 16, 2014
Orlov: Can anybody find me… a central banker to love?
[Last minute update: the repo rate has been just hiked to an eyewatering 17%! At the same time, the percentage of bullshit in the rationale given was lowered significantly: it is to prevent further ruble devaluation. Simply put (perhaps too simply), ruble liquidity for currency speculation has just dried up. At the same time, the central bank is backing long-term investments in industry at a far more reasonable 6.5% rate. Will this be enough to stop the slide?]
On December 11 Russia’s central bank hiked its rate by one percent, from 9.5% to 10.5%. The rationale offered by the bank’s governor Elvira Nabiullina was that this would stop the slide in the value of the ruble. But nobody laughed.
So a more laughable rationale was offered: the rate hike would help contain inflation. Here’s why that’s funny: suppose I am a Russian manufacturer making widgets and now have to borrow at 10.5% instead of 9.5%. I will price my widgets correspondingly higher in order to pay the higher interest. That’s price inflation. Then my workers will start complaining and threatening to defect, and I will have to give them raises; that’s wage inflation. That’s if my widgets are life-saving and people have no choice but to buy them; if my widgets are discretionary and I hike prices, people would simply buy fewer of them, so instead of taking the loan and increasing production I convert my savings into dollars or euros, close up shop and leave the country, telling everyone that I’ve had enough of this Russian central bank nonsense. But what if that’s exactly what the bureaucrats at Russia’s central bank want to see happen? Hmm…
The rate hike didn’t stop the ruble’s slide, for some very obvious reasons. First, a minor one: the very fact of the hike signaled the expectation that the ruble’s slide will continue. In fact, there has been a consistent pattern of Russia’s central bank mouthpieces acting as the ruble’s worst enemies in signaling that they expect it to drop. Second, the major one: speculators, including powerful insiders such as German Gref, president of Sberbank, are dong all they can to push the ruble down while betting that it will go down even more as people try to rescue their savings by selling their rubles. While most regular Russians go to Sberbank to pay their utility bills and municipal fees, a few highly irregular Russians (and a few foreigners among them) go to Sberbank to sit in posh offices in front of trading terminals and gamble away the regular Russians’ savings. The regular Russians are rather upset about this state of affairs, and 70% of them state in opinion polls that they consider currency manipulation to be a crime and want the criminals stopped and punished. Mr. Gref begs to differ and even expressed some political ambitions; is he going to be the next Michael Khodorkovsky?
“We know who the speculators are,” said Putin during his recent state of the nation speech, as the camera zoomed in on Elvira Nabiullina, who blushed and probably peed her panties a tiny bit (I know I would have if I were her). In spite of the Stalinesque overtones, at the moment Putin is pushing on a string. You see, once you staff the central bank with economic liberals trained to follow the dictates of the IMF, and do nothing to shut the revolving door between the central bank and other big banks (after all, if the Wall Street boys can do it, why can’t the Russians?) then why wouldn’t they rob their own people every chance they get, then attempt to use their ill-gotten gains to subvert the political system—just like the Americans have done?
Some people are starting to loudly criticize Putin for his inaction; but what can he do? Ideologically, he is a statist, and has done a good job of shoring up Russian sovereignty, clawing back control of natural resources from foreign interests and curtailing foreign manipulation of Russian politics. But he is also an economic liberal who believes in market mechanisms and the free flow of capital. He can’t go after the bankers on the basis of ideology alone, because what ideological differences are there? And so, once again, he is being patient, letting the bankers burn the old “wooden” ruble all the way to the ground, and their own career prospects in the process. And then he will step in and solve the ensuing political problem, as a political problem rather than as a financial one.
This strategy carries a very substantial opportunity cost. After all, if the central bank acted on behalf of regular Russians and their employers, it could take some very impressive and effective steps. For instance, it could buy out western-held Russian debt and declare force majeur on its repayment until financial sanctions against Russia are lifted. It could drop its interest rate for specifically targeted domestic industries—those involved in import replacement. And, most obviously, it could very effectively curtail the activities of well-connected financial insiders aimed at destroying the value of the ruble. Putin said he knows who they are. I hope that they are wearing adult diapers. I wouldn’t be at all surprised if they get Khodorkovskied before too long.
This conversion of an insoluble financial problem into a mundane political problem may take a bit of time, but once it has run its course the longer-term prognosis is still reasonably good. Russia has very low government debt, huge gold reserves, and in spite of the much lower price of oil its energy exports are still profitable. You see, at the wellhead Russian oil costs much less than shale oil in the US, or Canadian tar sands, or Norwegian off-shore oil, and so the Russian oil industry can survive a period of low oil prices, whereas these other producers may no longer be around by the time the price of oil recovers. Because the ruble has dropped even more than oil, the Russian treasury is going to be flush with tax receipts, and won’t have to try to finance a budget deficit. The 18% or so of revenue that the Russian treasury gets from energy exports is significant, but even more significant are the remaining 82%, much of which come from payroll taxes (some of the lowest in Europe, by the way). And therein lies a bigger danger: that because of loss of access to western sources of financing due to the sanctions, coupled with central bank shenanigans with hiking rates instead of dropping them, Russia’s domestic economy will experience a severe downturn.
With all the political and financial instability sweeping the world, it’s hard to make detailed predictions of any sort, but I will venture to issue just one little health warning: Russia’s central bankers, along with their friends and colleagues in the financial industry, are poised to experience an extreme lack of love from their own people.
24 Comments on "Orlov: Can anybody find me… a central banker to love?"
Makati1 on Tue, 16th Dec 2014 6:43 am
I suspect that that “lack of love” may be contagious to other central bankers eventually. Especially in the West where it is most needed. Guillotine anyone?
Davy on Tue, 16th Dec 2014 8:38 am
OrLost, whatsch ya sayin now about the US death and the Russia ascension into Heaven? Maybe you best get a life and move back to the safety and security of your homeland. Russia is not looking any better than the broken US.
As a matter of fact OrLost you remind me of a board propaganda bitch we have here on PO that is rabidly anti American yet sucks his mother’s milk from her. Nothing is more hypocritical in my book.
Rodster on Tue, 16th Dec 2014 10:01 am
The Bankster to love is usually found holding a nail gun before jumping off a tall building.
JuanP on Tue, 16th Dec 2014 11:39 am
I have been thinking about the role Russia’s Central Bank plays, and its future. I think it is in Russia’s best interest to nationalize the Central Bank.
Putin’s main weakness, as Orlov correctly points out, is that he is an economic liberal at heart. He strongly believes in the current global financial system. He thinks he can fight the USA while still supporting the global financial system. He is blinded to the fact that destroying the GFS is the best way to stop the US government’s attempts to achieve total global domination. Putin is being forced against his will to create alternative financial institutions. His policies are reactive rather than proactive.
I hate Central banks in general.
MSN Fanboy on Tue, 16th Dec 2014 11:44 am
“As a matter of fact OrLost you remind me of a board propaganda bitch we have here on PO that is rabidly anti American yet sucks his mother’s milk from her. Nothing is more hypocritical in my book”
Davy wins the honesty awards 2014
Davy on Tue, 16th Dec 2014 12:23 pm
Greg says – He (Putt) is an economic liberal at heart. He strongly believes in the current global financial system. He thinks he can fight the USA while still supporting the global financial system. He is blinded to the fact that destroying the GFS is the best way to stop the US government’s attempts to achieve total global domination. Putin is being forced against his will to create alternative financial institutions. His policies are reactive rather than proactive.
Greg, great observation and something that points to Putt’s gamble. I am not sure Russia or any other country can decouple from the US dominated system currently. The US dominated system has been hijacked so it is currently a hybrid global 1%er system using the vestiges of the old US system. Of course the usual thieves from DC and NY are part of this but it is much broader than it once was. The system is all about money flows seeking out the best parasitic arbitrage to feed upon. The global civilian mainstreet’ers are cannon fodder for this cannibalization.
Putt, in the respect of wanting to leave this system is brilliant, yet, he is fighting a battle I am not sure Russia is big enough to pull off. I personally think he picked the wrong time to make his move. This oil situation whether a conspiracy or a natural crisis or both is very bad timing for Putin. He has invested so much in the military, foreign adventurism, and an alternative financial system. The last thing Putt needs now is less for less. This is not over yet though. Oil prices could very well spike back up killing two birds with one stone for Putt. We know BAU is dangerously overextended and along with that the GFS. Oil price volatility may be the black swan that kills the GFS. I would not write Russia off for one moment.
Davy on Tue, 16th Dec 2014 12:24 pm
MSM, to be fair, I am just an asshole that talks too much but I am glad I gave you some entertainment!
Speculawyer on Tue, 16th Dec 2014 12:59 pm
Looks like Orlov has finally allowed some reality to entered his view of Russia and is no longer blowing Putin.
Speculawyer on Tue, 16th Dec 2014 1:27 pm
Orlov’s big thesis had been that the USA is going to collapse like the USSR did. But now it looks more likely that Russia is going to collapse AGAIN while the USA continues along relatively fine. He’s been quite angry about this but at least this posting has some rationality in it.
GregT on Tue, 16th Dec 2014 1:59 pm
Davy,
Not what Greg said, but rather what Juan said. I do agree with him none-the-less.
Russia is merely responding to the games being played by western powers. Russia decoupling from the GFS is not something that she had planned on doing, but is being forced to do. Russia may very well weather the coming financial storm better than the west. She has some very highly educated people in her parliament, unlike our systems in the west.
I still think that Orlov will be proven correct. We are in much more dire straits in the west, than what Russia will be. The Russians are making plans, our governments are acting like a bunch of school children in comparison.
Davy on Tue, 16th Dec 2014 2:28 pm
Geeze Greg, maybe I need to give it a rest. This morning was a raw morning in MO with a cold humid wind howling. I hung out by the wood stove most of the morning. I am now working on the grape trellises I didn’t get done when it was nice.
This financial crisis has me worked up. Sorry for the mix up Juan and Greg.
Apneaman on Tue, 16th Dec 2014 2:33 pm
Americans and westerners continue to get get ass raped by their own government and elite, yet their hate and screaming is largely directed at foreigners they know nothing about. What Russian policy has taken food off your table? The Chinese never came knocking on our door. They were largely isolated until our leaders legislated “free trade” agreements on behalf of a minority elite and got rid of 25 million manufacturing jobs in N.America in the last 30 years. It’s like watching the Stockholm syndrome in action. I don’t give a shit about the Russians or Chinese. They are not the ones who are ruining my country. That project is being done by my fellow countrymen on behalf of an already wealthy elite that were born and raised here. These same elite are the ones funding the propaganda to deflect the blame and anger of the plebs towards the big bad foreigner. I guess it’s easier to vent that way then actually standing up to one’s true oppressors. Safe and warm shouting from the cyber side lines. Anyone need some more lube?
Apneaman on Tue, 16th Dec 2014 2:57 pm
Blame the Russians or Chinese or Bolivians or anyone from out of country. If the blame is exclusively homegrown then one has to answer what they did to stop it. Can’t have that. Fucking Bolivians! Their always messing with my liberty.
Most Americans’ best days are behind them
http://www.washingtonpost.com/wp-srv/special/business/peak-income/
Apneaman on Tue, 16th Dec 2014 3:05 pm
CNN: “Russia Headed for Crash.”
“In the headlong rush toward the edge of the cliff at the end of the industrial age, Russia has suddenly pulled ahead by a nose(dive). The headline “Russia Headed for Crash” has appeared on the CNN Money website, …”
http://www.dailyimpact.net/2014/12/16/cnn-russia-headed-for-crash/#more-2600
Davy on Tue, 16th Dec 2014 3:58 pm
AP, the Headline should read “Russia headed for a crash and the west forgot it has a rope fastened to her.” You know a Wile E Coyote moment. If the West lets Russia go down “That’s all she wrote folks”. BAU is KAPUT.
Makati1 on Tue, 16th Dec 2014 6:31 pm
There are brainwashed American flag wavers here and those who see thru the fog of the MSM Iron Curtain. Americans need enemies to exist. Without enemies they would be forced to look at themselves, and the picture would not be pretty. So the bullshit will flow in tsunamis to prevent that self evaluation. More drugs anyone?
Davy on Tue, 16th Dec 2014 6:36 pm
Mak, you have just painted a self portrait of yourself.
MKohnen on Wed, 17th Dec 2014 12:14 am
It’s a very interesting game being played out, that’s for sure. Russia certainly will take a beating, but it fights like a boxer who knows he can take a beating. I don’t think Russia actually has some giant left/right hook to deliver just at the right time. Instead, it is continuing the game that Russia and China have been playing for a long time – waiting for Americas over-spending and over-consumption to catch up with it. Speculawyer states “while the USA continues along relatively fine.” On what? Cooked numbers and fraudulent cash. Same thing as the Russians and Chinese. But neither of those countries are doing on the American scale. If you look at fundamental Russian economic stats, they look quite good. If you look at US stats, ugh! If a country is in trouble when its debt reaches 100% of GDP, how is the US relatively fine? By comparing to Russia’s 10%? Is Russia’s number a lie? Ok, use 30% … or even 50%! It’s still way better. Since we can assume that the US’ number is also a lie, but let’s pretend a more modest one, we could say 130%!
If hatches are battened down, Russia will fair better than the US in the long run, for whatever that means. But in this battle, the baton is being handed firmly to China. The lower oil prices are a firm win for them, and low prices won’t crash *their* fracking industry. Maybe that’s why Russia is itching for hitching its wagon to the Asian super power!
Northwest Resident on Wed, 17th Dec 2014 1:26 am
I continue to think that what’s going on with Russia is a master plan in action to force Europe and Eurasia into a closer and more independent economic arrangement, to wean them away from dependence on American security and financial arrangements. It makes sense, long term, because the future we’re heading into will see much less international trade and business, and lot more local/regional trade and business. The sooner that Russia, China, Western Europe and all others on the Eurasian continent get used to depending on each other for trade, security arrangements and business dealings, the better. That means disconnecting from The Dollar, eventually, and the financial system they have all adapted to, dominated by The Dollar. There are a lot of vested interests in Eurasia who would never agree in “normal times” to do the big disconnect and financial/trade reconfiguration, but under threat of war and under duress, they’ll just have to deal with it — which seems to me to be “the plan”. That makes more sense to me than Russia, America and Western Europe all gearing up for war. Maybe insanity is the driving force, but for now I doubt it. My guess is that more rational forces are at work, staging chaos as a methodology to achieving desired ends.
Davy on Wed, 17th Dec 2014 5:55 am
Russia, as a banana resource republic never had a diversified enough economy to decouple from the global system. IMA that is no longer American dominate but dominated by the HNW individuals of the world. Russia, unwillingly under the mafia leadership of Czar Putt and his oligarch cabal took a gamble. It was poor timing for the type of success he was looking for. With that said Putt is by no means vanquished.
The Russian Chinese pivot is an extremely potent ace in the hole which can be realized if BAU holds together which is debatable. China and Russia could seek monetary union with gold and maybe oil back currency that would create a solid competitor to the western dominated system. Putt could demand this currency for oil & gas for example. No use restricting oil and gas to Europe make them pay in this new currency.
This act will basically put Putt’s Russia as a protectorate and vassal state to China. That is not necessarily a victory but it is security. We don’t know how BAU will fracture so this may be a better arrangement than what awaits the west as far as a softer landing to a postindustrial world. I personally doubt it will be soft for long because Asia has little carrying capacity and most of its countryside is brownfield sites that won’t produce the necessary food needed by the mega population centers. Much of China’s water has been degraded.
This carrying capacity disaster will probably lead to a Texas style land grab which occurred with Mexico in 19th century. Chinese are going to flood into the Asian Russia and there will be little Russia can do. So in conclusion Putt is by no means vanquished but his dream of New World Order under Russia leadership in opposition to the west is probably dead. China will be strengthened by the absorption of Russia into its black hole of overpopulation and over consumption. China is the real winner here and will buy itself time until it is ripped apart by famine and social chaos when BAU can no longer feed its people.
This article mentions the monetary union I spoke of.
http://www.zerohedge.com/news/2014-12-16/western-banks-cut-liquidity-russian-entities
“The question is will Putin swallow his pride and proceed with the next logical step as the Eurasian axis realizes the time to abandon the dollar has long past, that now only actions matter and not words, and joins forces with China in a new monetary union, one which combines the Ruble and the Yuan, and is backed by China’s gold and Russia’s natural resources, as cheap as they may be for the time being… until one or more of the largest middle-east oil exporters experiences a major and “unexpected” geopoolitical incident, one which sends the price of oil soaring right back up.”
JuanP on Wed, 17th Dec 2014 9:06 am
MKohnen, I found your comment very interesting. I totally agree that Russia and China are playing a waiting game against the USA. It is the USA that is pushing developments, not Russia and China. They are waiting for the US economy to collapse, as we all understand it will eventually on its own.
I also agree with your assesment of Russia’s financial situation. Russia has little debt, large savings, a budget surplus, and all the resources it needs to survive on its own, they will do fine.
The Russians are suffering and will continue to suffer for the foreseeable future, but the vast majority of Russians understand that this is because of an economic, political, diplomatic, and propaganda war being waged against Russia by the USA and its vassals. They hate us now and we have lost them for the rest of our lives. And they are more united than ever behind Putin.
We also agree that China is the largest winner so far. I also think that the USA has benefited in the short term, but will regret in the future. There is no way out I can imagine that doesn’t include the USA losing, too.
As far as how things will play out in the USA and Russia, I think it is impossible to say. Americans will likely fall harder and longer because they are higher. After the dust settles, both countries have many advantages and disadvantages, but are in a better situation than most of the world. Both countries will continue to have rich and poor, only on different scale.
And then, who knows? Survival of the fittest, nuclear war, extinction? All options are on the table right now.
JuanP on Wed, 17th Dec 2014 9:19 am
Davy, I have to agree, against my will, that the US government is a tool of TPTB. I don’t think most of the people making policy today in the USA give a hoot about the American people or pay them any mind. It is a sad thing to admit for me, I imagine sadder for you, it has such horrible implications.
We live in a world were US policy is made by puppeteer puppets. These guys are both pulling and getting pulled at the same time.
Davy on Wed, 17th Dec 2014 9:39 am
Juan, IMA in response this is a global plutocratic influence and not confined to US HNW individuals.
Juan, I agree China and Russia are waiting on a collapse but I see them waiting on the U.S. dominated financial system collapse with a pivot for Russia/China regional arrangement. The only problem for them is they are collapsing just as quick as the U.S. if not quicker.
You also mention the height of the U.S. fall. I agree in regards to Russia but not China. China is in the worst possible position with growth expectations and social stability conditionality. This condition as well as a destroyed carrying capacity.
China foolishly pissed away sustainability and resilience per hyper growth. China has created mega population areas with a brownfield countryside denuded of food potential and healthy water. China is a hollow dragon full of cancers.
JuanP on Wed, 17th Dec 2014 10:10 am
Davy, I could have been more specific. TPTB are global, not exclusively American, IMO. I don’t see the USA as doing something “bad” or worse than anybody else would do in their position. I think all humans are more or less the same regardless of their origin.
If Russia, the USA, or China collapse, I believe it would bring about the end of global BAU. These three countries have the power to destroy the global financial system. I believe all three would use this power if they felt the need.