#11
Moscow Tribune
March 22, 2002
EXIT GERASCHENKO
But no change in policy?
By Stanislav Menshikov

When big and colourful figures suddenly leave the scene there is a lot of talk about why it happened and what is in store. Viktor Geraschenko was one of those rare types in the top Russian hierarchy that were clearly distinguishable among the otherwise predominantly faceless members of competing clans. The former central banker did not belong to any clan making him de facto independent, as central bankers should be. In addition, he was competent and honest, an equally rare quality in modern Russia.

Such figures are a great asset in any country. But they are also a big nuisance to bureaucratic and business power groups who seek to maximise their own interests, not the national one. That is why many people in government and business were long demanding Geraschenko's resignation and hailed it when it happened. Even his worst enemies admit that he was a factor of stability in the post-1998-crisis period, but they also castigate him as a conservative who became a "barrier to reform". Let us see whether that is true.

The fallen giant is mainly criticised for three alleged wrongdoings. He supported an overvalued rouble, which is bad for the economy. He opposed liberalising currency controls, which is against free market principles. And he impeded reforming the banking industry and thus prevented the flow of bank loans to the real sector. None of these criticisms is convincing.

The story of the overvalued rouble is largely fiction. From September 1998, when Geraschenko returned to the Bank of Russia and today the rouble fell from around 6:1 to the dollar to 31:1, or more than 5 times. In the same period domestic prices rose fourfold. The net result is devaluation by 20 percent. True, most of it happened before 2000. More recently, the rouble was stable or rising which helped increase rouble savings. When the balance of payments of a country is in surplus, as in Russia's case, it is hard to keep the domestic currency from rising. Sergei Ignatiev, Geraschenko's successor, believes that the current exchange rate is just right, neither overvalued or undervalued. He intends to keep it that way.

By liberalising currency controls, its proponents mainly mean removing the rule about compulsory selling half of exporters' currency earnings to the central bank. In principle, nobody objects, but both Geraschenko and Ignatiev agree that this should done step by step, exercising necessary caution. The reason is that overall demand for hard currency is too large ($75 billion in 2001). It includes buying by importers, by the government for servicing its foreign debt, and by the population that hedges against domestic inflation. Compulsory selling by exporters ($46 billion) covers 62 percent of total demand and is a reasonable safeguard against undue speculation. Full liberalisation can come only after at least a few years of market stability and after capital flight, which remains a plague, falls to a minimum.

As to banking reform, Geraschenko indeed opposed a plan proposed by Big Business to set a prohibitively high minimum capital requirement that would automatically exclude many medium and small-sized commercial banks from operating. He claimed that this measure would disorganise payments in many parts of the country where local enterprises do not have access to the big banks situated mostly in Moscow and Saint Petersburg. Geraschenko succeeded in convincing the government, and the plan fell through. Now Big Business believes it is time for revenge. But it is not a fact that an oligopoly of large banks is better than freely competing smaller ones. Neither is it clear that by gobbling up smaller fry big banks will automatically increase loans to the real sector. The main barrier today is not lack of adequate funds but uncertainty about getting one's money back. Neither Geraschenko nor Ignatiev can do much about it. Reduced lending risks will come only with changes in business practices and general economic growth

So why were Vladimir Putin and Mikhail Kasyanov so eager to remove Geraschenko at this time? The only reasonable explanation is their desire to increase control over the vast resources of the Bank of Russia together with the Sberbank and Vneshtorgbank, where the central bank is a majority stockholder. Putin is worried about the recent slowdown in economic growth and has made it clear that he would hold Kasyanov responsible. The central bank in Russia does not wield much influence on interest rates. But it can be useful by lending more money to the government, i.e. pump-priming economic activity via expanded government spending. This is contrary to the monetarist religion professed by Messrs. Kasyanov, Kudrin Gref and others but when other magic wands fail, bastard Keynesianism will do. Reaganomics was one successful historical instance.

Will Ignatiev oblige? You bet! The only possible danger is that the new central banker is widely rumoured to be a "Chubais man". In the new presidential race that starts pretty soon Anatoly Chubais could well emerge on the other side of the barricades from Vladimir Putin. But perhaps the president knows better who is who in Russian politics.