Yury Koptelov: ‘The CB’s key rate is nothing but a ‘beautiful number’ in reports’

Unreasonable inflation

Just on Friday, the 13^th, the Bank of Russia announced a reduction in the “key rate” to a record-low level in the history of use of this indicator applied to evaluate the country’s economy’s sustainability. It is considered that such actions of the central institution, which is responsible for the state’s monetary policy, stimulate the allocation of the financial system’s money to develop economic processes making borrowed money available for representatives of the real sector, they also prove the stably low inflation level, as by fixing an acceptable “key rate” the regulator goes by the above-mentioned indicator.

The scheme of interaction is simple: the Central Bank that is allegedly authorised to make money (to put it simply: print money in cash or consider their growth on accounts through a bank) hands out money (that is conditionally “printed”) to commercial banks at this rate so that they will hand it over to enterprises to develop a business. And if the rate of the money received is low, commercial banks have to provide businesspeople with cheap loans. Inflation here is unreasonable: as the higher cost of living rate (the same “inflation”) recognised by state statistical bodies is stably low, a business may not be afraid of cataclysms in the near future and easily plans its development and finance it with this borrowed money.

However, the reality isn’t the simplest thing and not always complies with the perfect picture painted by our “financial artists”. Unfortunately, most of the economists clearly acknowledge the fact that this tool of the monetary policy in our country, in fact, doesn’t have any impact on the current economic situation, it isn’t a catalyst for processes of economic growth and entrepreneurial activity. It is nothing but a “beautiful number” in reports…

Our leaders of the country miss issues of the domestic economy with such obvious successes in international politics

To start with, if the Bank of Russia provides money to commercial banks, it does it for a very short term (that doesn’t help in creating funds to finance loan operations by banks) supporting just borrowing banks’ current solvency. And the number of banks allowed to use this trough is far from the general number of those who really need such support to deliver this money to the end consumer — real entrepreneurs and enterprises.

The second factor suggests that nowadays commercial banks suffer from excess liquidity (a surplus of “free” money) and obviously don’t need the support of the CB’s money. But the money doesn’t go to the economy, enterprises, real businesses. While banks desperately need tools and opportunities to make money, free money anyway remains on their accounts or go back to the same Central Bank as deposits and investments in state securities.

There are several reasons for such a paradox.

Firstly, the production sector that created a product with added value is the key consumer of loans (that’s to say, when it is possible to make Buratino out of a piece of wood priced at one ruble and that can be sold for 5 rubles having spent just 2 rubles on production, plus to the price of the log itself. 5 — 2 — 1 = 2 The remaining 2 rubles after the sale will be the added value). An enterprise can use added value to pay a loan’s interest (here the lower the better). At this moment a loan rate has a direct influence on the enterprise’s growth, that’s to say, the rest of money as net profit can be spent by an entrepreneur to develop this business.

There is a small caveat: this is possible if this businessperson isn’t greedy and doesn’t put all profit into his pocket. Such a lovely situation is possible only when the business owner is sure that the money invested in the enterprise can generate a bigger income, which, in turn, is possible only in case of a long-term stable economic situation in the country, which, sadly, hasn’t been seen for years…

Secondly, it is a surprise for me how our leaders of the country miss issues of the domestic economy that is gradually going down to a deep pit with such obvious successes (and even victories) in international politics and cooperation in external markets. No matter how vigorously official resources report on successes in development, in real life we see plenty of closed shop window blinds in shopping malls, cheaper products that are in demand among the impoverishing population, closing factories in regions and a big number of small businesses stopping their operation and so on. It means an absence of jobs, a fall in population’s income that has to buy goods made by the above-mentioned enterprises — consumers of loans, a fall in taxes on sales, salaries, profit that (incomes) are in the end a source of public workers’ salaries and pensions. In other words, there is an economy that is exhausted because of the absence of vital force doesn’t need a blood vessel in the form of money flows. Entrepreneurs don’t borrow money in banks because they don’t understand where and why they should invest it and how they will be able to pay it back. While nobody wants to lose a business because of thoughtlessly accumulated debts.

There is the other side of the coin linked with the Central Bank’s regulatory activity, tax officers and other controlling agencies’ “successes”, the domestic economic policy of the state in general. The complex of these issues works by mutual agreement. As Boa said in the famous cartoon: “I can’t be measured in parts, I am a whole being!” But Russian “leading economies” diligently follow the principle of “dividing flies and cutlets”, moreover, both the flies and cutlets are served on different plates.

But we will talk about it next time…