A private view on the global crisis and the measures being taken to combat it in Russia
Officially, the most obvious reasons the catalyzed the current crisis are being covered up, either because of high diplomatic expediency or the incredible scale of negligence of fundamental economic laws. Russian President Dmitry Medvedev has twice noted that nobody today knows the actual mechanisms of this crisis. And, how about the law of value, which is also known as the law of price movements? When the excessively over bloated prices of stocks, oil, real-estate assets and other goods finally burst, are these not the manifestations of the of law of value? To ignore this fundamental law is as ridiculous as ignoring the law of gravity.
And, why did these prices rise in the first place? The reason for this lies literally on the surface – and that is the excessive use of monetary financing instruments in the global and national economies, or simply put, the ‘overproduction’ of money. The chief culprit of this questionable practice is the U.S. Federal Reserve System (FRS), which has irresponsibly been offering cheap loans for several years. However, no single word of condemnation of this policy has been mentioned at official summits and in world’s leading nations’ anticrisis programs. Besides, all these leaders, acting as though acting in collusion, have also started to treat their national economic problems with the same questionable medical receipt by ‘flooding’ their economies with cash. This is, to put it differently, like treating a drug addict with narcotics, and it is clear that nothing good will result from such strategy, except a new wave of crisis.
No sooner than the global financial crisis had hit Russia than the opposition politicians quickly remembered Mikhail Bulgakov’s apt aphorism that says ‘crises are in the heads rather in the restrooms.’ Naturally, these politicians have excluded themselves from such ‘heads.’ Meanwhile, these crises in people’s heads are both our common misfortune and main enemy. The overwhelming majority of politicians, economists and sociologists do not adequately perceive today’s modern economic era, which they wrongly call a free-market economy, when in the real sense, it is actually financial economy. French President Nikolas Sarkozy has openly and wholeheartedly condemned the Anglo-Saxon model of free market economy, instead knocking his own head that houses this economic model, in accordance with Bulgakov’s aphorism. However, Sarkozy’s statements are no more than a mere theatrical gesture, as he and U.S. Barack Obama, belong to that rather narrow inner circle of people, who fully understand why and who is favored by the current ‘universal deception’ over the nature of the present economic situations.
“Last year was a very successful one, but the outbreak of the global economic crisis has turned everything upside, escalating competition, reducing flight orders, and making defaults on due debts a stark reality.”
The Russian government’s first anticrisis package was utterly disappointing, as it gave the impressions that either its authors were actually not conversant with the basic lessons of the global economic crises of the 20th century or had deliberately chosen to ignore them entirely. Specifically, this program made no provisions whatsoever for stock exchange holidays, suspension of forex market activities, freezing of currency exchange rates, blanket writing-offs of interbank debts, which is one of the most effective methods of combating acute liquidity crunches in the banking sector, etc. On the contrary, the country was left to drift on its own in the turbulent seas of free market economy, the local currency devalued, while the government’s financial support was extended primarily to the stock market players, who had gone bust, via infusion of new cash. This policy only stopped bank runs and panic behaviors from small bank depositors, but at what a price? The consumer prices soared, most citizens’ living standards fell, as unemployment skyrocketed, etc. At the end, it remains totally unclear, where the almost 200 billions in foreign exchange currencies, and not to mention tens of billions in ruble reserves, have gone into, and this is a staggering figure, the equivalent of a three-year increase in Russia’s GDP.
Similarly, the other Anticrisis Program recently approved by the Russian government is not very inspiring either. In the very first lines, the authors ‘hinted that things were relatively fine’ in Russia until the global recession set in. The fact that the Russian Central Bank (CB) has been messing things up throughout its history in much same was as the U.S. FRS has also been kept under cover. The program has superb targets, but falls short on how to achieve the stated goals via the same old economic policy, whose strategic mission is the full integration of Russia into the global economy. Therefore, it is aimed more at promoting the external, rather than the domestic market, national economy and internal production. This is the real blunder, both in theory and practice. This is because, in theory, foreign economic policies are shaped by domestic issues, and not the other way around, while, the current official strategy is, in practice, tantamount to an antisocial habit of a working family man, 
who, instead of using his hard-earned money to cater for his family, prefers to waste it on gambling, buddies or mistresses.
The crisis and my company
Russia and rest of the world are ‘brainstorming’ over the causes, impacts and exit strategies from the current global economic recession, and this is why the fact that The Russia Corporate World business journal has decided to contribute to ‘this mission’ is highly commendable. Of specific importance is the fact that the journal has provided an opportunity to CEOs of companies, regardless of their levels and sizes, to openly voice their opinions on these vital issues, without doubting their abilities/qualifications to offer professional views, not only about their individual companies and industries, but also on the entire global crisis and the anti-crisis strategy arrangements being made at the highest level by government officials.
Trinity Charter Project, the company where I’m the CEO, provides brokerage services on the global and national air cargo- and passenger travel services markets. Our key customers are owners of commercial cargoes and executives of major companies, banks and other organizations, who, seeking to economize personal times, usually prefer to use small, but fast and comfortable aircraft. This is a very specific business, requiring prompt responses, flexibility, strong business ethics, modern communication culture that involves the use of a number of foreign languages, and, occasionally, full and round-the-clock commitment of all its workers. It is a difficult, but highly interesting and rewarding business.
Last year was a very successful one, but the outbreak of the global economic recession has turned everything upside. Competition has escalated, orders for flights have tapered off, defaults on due debts have become a stark reality. Luckily, the situation in our company is not as tragic as the situations in the vast majority of other companies in the real and financial sectors, because we had always stayed away from stock market speculations and are completely free from the burden of bank loans and other external borrowings. Our anticrisis program is quite standard and typical, and essentially requires improvements in personal skills, optimization of corporate expenses, debt restructuring, financial aid from the company’s founders, and, most importantly, the expansion of its customer base via adoption of a more flexible pricing policy and enhancement in quality of customer services. Despite the current crisis, we intend to fully implement all our business expansion plans.
“The Russian government’s first anticrisis package was utterly disappointing, as it gave the impressions that either its authors were actually not conversant with the basic lessons of the global economic crises of the 20th century or had deliberately chosen to ignore them entirely.”
Our major concern, however, is the disastrous state of the real sector of the economy that ‘feeds’ the whole country, our company included, which has been on excruciating ‘loan starvation diet,’ as far as banking credits are concerned, due to the CB’s policy of unreasonably high refinancing rate. In defending this policy, CB Chairman Sergei Ignatiev says the refinancing rate cannot be lower than the prevailing inflation level. But the actual reason lies in Ignatiev’s fear to inject more liquidity into the economy, and his inability and/or unwillingness to ensure that the emitted money capital reaches the real economic sector. However, he is absolutely not afraid to mint new rubles to buy euros and U.S. dollars, a strategy that he has successfully used over the years. Indeed, Ignatiev has bought and reserved over $600bln over the course of eight years as the CB chairman, without injecting an equivalent amount of commodity goods onto the domestic market. It is absolutely impossible to avoid recalcitrant inflation under such policy. This means that the CB is simultaneously both the key generator and fighter of inflation, while, at the same time, using the negative inflationary trends as a reason to block the flow of capital to the real economic sector.
Major features and flaws in contemporary financial system
The modern financial system resulted from the downfall of the monopoly of gold as a monetary good. This process initially started in certain countries between the WWI and WWII, and later spread to the international arena in the first half of the 1970s. Today, the bank sector, which forms the backbone of the contemporary financial system, is characterized by the following fundamentals: the centralization of the loans and non-cash transactions in banks, existence of a central bank, which enjoys supreme banking powers, regulatory measures, and the monopoly over monetary financing instruments, namely, the power of issuing financial capital (money) — in form of loans and banknotes
Formally, the supreme banking powers and the monopoly on emission of financial capital belong to a country’s central bank, which means the government is the real holder of these powers. Therefore, the modern banking system is fundamentally different from the gold-standard-based system. The first is based on the monopoly of ‘financial capital’ and, therefore, on the state’s monopoly on the issue of non-cash financial capital, including banknotes, which cannot be converted into gold, while the latter is based on the monopoly of gold as a monetary commodity, and, therefore, on state’s monopoly to mint gold and print gold-convertible banknotes.
As already noted, the central bank is the nucleus of the modern financial system, whose major flaw stems from its potential power to mint (issue) excessive financial capital The financial authorities often misuse this power to attain concrete goals, for instance, either as a means to ‘self enrichment’ or often to abuse the system, especially when run by reckless individuals. Either way, the negative impacts of such irresponsible financial policy are absolutely the same for 
the government. What makes the excessive emission of financial capital in Russia unique is the fact that policy has been used over the years to form currency reserves and to exclusively fund the financial market, while the real sector, permanently deprived of such money capital infusion by a high refinancing rate, was forced into ‘financial starvation.’
The abuse of the monetary financing instruments proved to be the major cause of the current global recession, which initially started as financial crunch, and later degenerated into an economic crisis. All countries’ financial authorities, which had zealously used this policy, steadily drove their economies into recessions, as they hardly had the slightest idea of the exact type of economic systems they were running, or if they did, then it means that they deliberately crippled their economies. The guiltiest of this policy are the U.S. and EU financial authorities, which have contributed most to the economic recession, because they, being the owners of the global forex reserves currencies, stand to benefit more, both economically and politically, from this excessive financial emission policy.
Modern financial system’s major advantages
The modern financial system, based on the state monopoly of financial capital, is an immense achievement of the 20th century, which, as other human achievements, can be put to good or bad use. Its major advantage over the gold-based financial system is that it enables central banks to finance the real sector of the economy, production and trade, by issuing just financial capital alone. Consequently, this kind of financing does not require reserving any real monetary capital, including gold and convertible foreign currencies. All it takes is to keep the relevant accounting records in bank accounts and establish extensive control over the flow of financial capital in the economy. On the other hand, the nature of financial capital requires that issued capital should go exclusively into the real sector. Otherwise, it turns into a tool of ‘gratuitous self enrichment’ or, simply put, a ‘robbery’ instrument.
Russia is the only country, which has never applied the advantages of monetary financing to comprehensively and smoothly fund the real sector of its economy. Our financial ‘admirals’ appear to be remarkably ignorant of the financial history of the 20th century. If the developed countries had not diligently used monetary financing, there would have been no Marshall Plans, the post-WWII Europe and Soviet Union would not have risen from the ashes, and there also would have been no ‘economic wonders’ in Germany, Japan, Taiwan, and, finally, modern China and India. Unfortunately, these ‘economic wonders’ have so far somehow evaded the modern, market-oriented Russia.
“We need a self-controlling and independent financial system operating in the name of and under the control of the society. Only such system can attain the ultimate goal: maximally boost the driving engine of production, increase Russia’s national wealth and protect it from the chaos of global financial capital.”
To enjoy the advantages of the contemporary financial system to the fullest and prevent any excessive emission of financial capital and other woes currently confronting the banking and financial sectors, the application of monetary financing should be strictly target-oriented. In other words, loans should be exclusively provided by the central bank exclusively via a network of agent banks and extended exclusively to the real sector, and to be repaid in the same amount plus the banking commissions. In the absence of proper financial reform, the advantages of the modern financial system will periodically turn into flaws that are destructive and retrogressive to the whole world. The current global recession is yet another proof of this notion, and is, by the way, also a warning for the future.
Based on the aforementioned, I would suggest a list of new additional anticrisis measures to the Russian government’s official anticrisis programs. In practice, the implementation of these proposals s would be as follows. The CB opens special loan accounts for commercial banks willing to serve as its agents in financing the real sectors. Under this arrangement, these banks are to open special loan accounts for all companies in the real sector, a mandatory precondition. This means that each bank and company will have two bank accounts: thus, the banks will have correspondent and special loan accounts, while companies will have current and special loan accounts. The special loan accounts regime provides a consolidated ‘financial artery’ that goes directly into the real sector, thus ensuring that the extended loans really get to their designated destinations.
However, in crisis conditions, when such financial artery has yet to be created, it is necessary to immediately ban the use of cash printing to fund deficits in government budget and purchase of foreign currencies by CB. This means that the formation of forex reserves and acquisitions of stocks/bonds by the state should be carried out on the Finance Ministry’s direct orders and paid for with cash from the government’s budget. Thereafter, banks will be obliged to extend these loans to enterprises based exclusively on their credit- and business plans that are collaborated by real contracts signed with product suppliers and customers, thus minimizing the risks associated with defaults. Besides, a failure to repay these loans on time shall attract penalties envisaged by the regular banking practices.
The CB shall set the loan rate, a unified refinancing rate for entire real sector – at 3%, which will be distributed as follows: 2% for agent banks and 1% for CB. Two percent of production cost in real economy sector plus 2% of total buying prices to be paid by wholesale and retail traders represent a huge sum of money, which the agent banks need to really work hard to earn, instead of just waiting for companies to come forth with their credit- and business plans. First of all, they need to assign their authorized loan officials and, if necessary, even set up their loan departments in such companies to facilitate joint, prompt and professional executions of all the necessary paperwork and, also ensure, amongst others, that such companies are real, and not ‘fly-by-night’ entities, and that no ‘sham contracts’ with suppliers and customers, etc. are concluded. This is what the agent banks will be receiving the 2% commission for. In a nutshell, banks shall ‘go to the masses’ by working closely with the real sector companies via setting up their primary links therein.
A target-oriented financial system, which is fully merged with the real sector, is a vertical structure of the CB’s financial powers, which have been established not via the nationalization of the agent banks’ assets, but their core activities. Besides, this target-oriented, self-controlling and independent financial system will operate in the name of and under the control of the society. It is only such financial system that can attain the ultimate goal: maximally boost the driving engine of trade and production, significantly increase the national wealth and protect the country from the chaos of global financial capital associated with global and regional financial crises. At the same time, it will help eliminate lots of the abusive practices inherent in the current financial sector, thereby removing the evil, which is running ‘the show’ in our contemporary society.
*The author of this article is the CEO of Trinity Charter Project.
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