Yury Koptelov: ‘The policy of the country’s central bank brought economic life to deadlock’

“Non-traditional economy”: positive results of the banking market’s regulation — it is “fixation of what has been achieved, without hope for the future”. Part 3

Yury Koptelov: ‘The policy of the country’s central bank brought economic life to deadlock’

People who have never seen real clients, business processes and the market first-hand are creating instructions, while the supervisory board doesn’t have an opportunity to discuss the reality and turns and twists in a client’s business, inspectors are obliged to strictly comply with existing instructions, directions and recommendations, claims famous financier Yury Koptelov. In his op-ed column for Realnoe Vremya, he explains why precisely actions of the Central Bank are the reason for a fall in the economy’s growth pace in Russia.

Low bow to Accounts Chamber

The year began with a surprise. Even if we omit that the government changed and there were offered initiatives to change the Constitution, metamorphoses of consciousness are plain to see. Can this be linked with the “beautiful number” — 2020? It seems like a pair of glasses that help to recover sight and finally “soberly” have a look at the current state of the economy in Russia.

I give a low bow to the Accounts Chamber that was brave enough to admit the fact that the current policy of the country’s central bank brought economic life to deadlock and an absence of any progress in indicators of economic growth.

It is a bigger surprise that the Central Bank courageously admitted the disorder in final indicators of economic performance, especially in manufacturing and investment. Though it fibbed a bit providing reports on the reasons for such indicators. An analytic report based on a survey of industrial enterprises Why Industrial Enterprises Don’t Invest (January 2020) prepared by the Bank of Russia’s Research and Forecast Department finds several basic reasons:

  • a lack of enterprises’ own money for investment;
  • a high level of uncertainty of the economic situation;
  • a high cost of borrowings;
  • a long term of investment payback period;
  • estimated income below target;
  • limited possibility of borrowing money…

This survey summarises that the economy’s growth problems and the manufacturing sector’s development issues aren’t linked with the regulator’s activity, and actions in the monetary policy won’t influence the growth of investment and related indicators of economic development in the country.

Let’s try to have a look at it impartially having analysed actions and goals declared by the regulator and the financial sector living under its “strict” control. Because one wants to get to the reasons for those reasons the above-mentioned survey claimed.

Photo: audit.gov.ru
I give a low bow to the Accounts Chamber that was brave enough to admit the fact that the current policy of the country’s central bank brought economic life to deadlock and an absence of any progress in indicators of economic growth

Ways and tools to achieve goals that were set are the case

Besides the implacable battle against inflation we talked about, the CB fiercely fights for “cleanliness” of the financial sector by mercilessly “pulling weeds out” (revoking licences from unfavourable, in the Bank of Russia’s opinion, financial institutions) and “fertilising the soil” (tightening supervisory measures and regulatory burden on the rest of market players as much as possible). It seems to be a good deed — because they care about the people so that only the best and crystal clear financial institutions service it. But! It is no secret that the Central Bank was set a goal of consolidating and controlling all financial flows of the country a long time ago to organise transparent management of the financial sphere and the total amount of money providing the execution of presidential orders and declared strategic goals. Again, the task is lofty and, probably, necessary. The ways and tools for achieving the goals that were set are the case.

Realistically, many predecessors didn’t achieve a desirable result using a liberal approach for performing tasks of economic development, the new (then) management solved a simple mathematical task: managing 20-30 subordinate organisations was easier than a community of different financial structures that filled the market. But democracy reigned in the country, which didn’t envisage violence, this is why all the creativity was aimed at creating tools that enabled to explain the actions taken and made the decisions taken legitimate.

The harder banks do this job, the deeper pit they dig for themselves

The first blow was made to cash turnover — the Bank of Russia almost got rid of so-called “laundry banks” as the main infrastructure of cash turnover. Yes, tax collection went up, the budget revived, especially after sanctions-related problems that “suddenly closed the tap” of external investments. But did anybody count how many enterprises “died” and enterprises went bankrupt that lived either at the expense of cash turnover or irrevocably lost money in banks with revoked licences?

Photo: Maksim Platonov
Did anybody count how many enterprises “died” and enterprises went bankrupt that lived either at the expense of cash turnover or irrevocably lost money in banks with revoked licences?

Then the law 115-FL On Combating the Legalisation (Laundering) of Proceeds from Crime and Financing of Terrorism suddenly “came out of hibernation”. It must be said that it was adopted as early as 2011, but few were interested in it until 2015. It seems that the stricter compliance with legislation almost didn’t influence terrorism, while businesses did experience in full what entrepreneurs didn’t care about earlier and had little to do with running a business. Banks for which recommendations of the authority body were ranked as indisputable obligations track the “tax burden” and cleanliness of settlements with counteragents better than any tax inspection and examine all components of settlements like a scrupulous investigator with a syndrome of “snoop”. The “funniest” thing (yes, in quotations marks) is that the harder banks do this job, the deeper pit they dig for themselves. The indicator of required “tax burden” is connected with turnover on the account. As a result, if an enterprise’s accountant settles transactions on accounts in several banks, he will have to pay taxes from each account. “But it is basically inconvenient!” you will exclaim. And you will be right. It means that the accountant should think about it and choose the main account he will use to pay taxes without thinking if he met those recommendations on tax burden.

Then the law of preferences comes into effect: if an enterprise has an account in one of the biggest banks and in several small banks, in which he often gets his payments blocked, the more his receipts are examined and so on, as specific operations are more notable and account for a big share in the volume of payments of a small bank than a multimillion flow of transactions of giants of the banking industry. Guess on the first try: which bank will an accountant (and the director of the enterprise) choose as the main servicing partner? And now economic reasons seem to help small banks lose clients who have to leave the market because of the unprofitability of the business and unbearable burden of requirements for maintaining a staff that doesn’t do production activity and evaluate risks, creation of reserves that brings to an absence of a possibility of meeting regulations.

Photo: mylenta.ru
The Central Bank was set a goal of consolidating and controlling all financial flows of the country a long time ago to organise transparent management of the financial sphere and the total amount of money providing the execution of presidential orders and declared strategic goals

What investment you are talking about here

But, I am sorry, we were speaking about investment. So there are other reasons too. Despite the sad picture I depicted in the previous paragraph, the surplus of liquidity, that’s to say, unused money, on accounts of the banking system in 2019 (according to the Bank of Russia’s official statistics) was 2,8 trillion rubles. And taking advantage of all available tools, even not violating quite strict requirements of the CB for capital adequacy, by the Bank of Russia’s estimates, commercial banks can expand lending by more than 20 trillion rubles. Why doesn’t this money go to the economy?

Because allegedly a correct goal of minimising risks of losses in case of unsuccessful investment is the key principle here, which provides banks’ stability. Again, the achievement of the task becomes direct meeting rules and requirements excluding options and their flexible use. Despite the related regulation on risk assessment declares the evaluation of the quality of loans (and, consecutively, determination of the amount of reserves created) on the basis of “professional judgement”, the Bank of Russia admits only its employees as professionals. Banks’ any other arguments aren’t taken into account in case there is the smallest formal sign that a loan has another quality category, which immediately influences a sudden rise in requirements for created reserves and in general capital adequacy level and its compliance with current regulations of the bank’s financial stability. And violation of these regulations is a direct way to licence revocation. What investment are you talking about here?

Having created a portfolio of borrowers, which were once approved by the CB, banks try to keep fragile balance by all means. New clients are considered only in case they perfectly meet the requirements of instructions. But where have you seen a perfect situation in business that favours a rise in all indicators of the enterprise’s economic activity? And any changes in the financial state or, God forbid, a change in lending terms in favour of the client regarding his current situation brings to a growth of reserves, which at a certain point brings the economy of this operation to zero for the bank. Consequently, it is absolutely unprofitable for the banking sector to actively lend to businesses at the moment.

Photo: финблог.рф
Despite constant scrupulous monitoring business practices, people who have never seen real clients, business processes and the market first-hand are creating instructions, while the supervisory board doesn’t have an opportunity to discuss the reality and turns and twists in a client’s business, inspectors are obliged to strictly comply with existing instructions, directions and recommendations

Indicators in banking system are still better, but it is fixation of what was achieved

Another moment to take into account — despite constant scrupulous monitoring business practices, people who have never seen real clients, business processes and the market first-hand are creating instructions, while the supervisory board doesn’t have an opportunity to discuss the reality and turns and twists in a client’s business, inspectors are obliged to strictly comply with existing instructions, directions and recommendations.

So there is no dialogue, not to mention discussion, between two parts of the system, giving way to a mute fight for survival for their “place in the sun” for some and turning the living organism into a mechanic cyborg for others. But the mechanism can reproduce a situation, technology, process and unable to develop itself.

Like in our case, it seems that indicators in the banking system are better, and the mechanism has operated like clockwork in recent time, but it is fixation of what was achieved, without hope for the future.

By Yury Koptelov