Russia in the Global Financial System

By Sergei Storchak, Deputy Finance Minster of the

Financiers all over the world, including the French, recollect the 1990s as the years of large-scale changes and global financial turmoil. The changes primarily included the introduction of the euro, the dramatic strengthening of the role of financial (debt) markets as an alternative to banking (syndicated) credits, and a cardinal change of policies amongst the Paris Club member countries towards regulating developing countries’ debts in writing-off of accumulated debts (instead of its restructuring).Turmoil included the debt crisis in the former USSR which together with other things led to its collapse, and the financial crisis of 1997-1998, effecting the emerging markets in a number of countries, including Russia. Regardless of the global imbalances and the resulting system risks, we could say that not only the global financial system has overcome these problems, but also has considerably strengthened over the past six or seven years.

However, there is not much sense in using “what ifs” to a single participant of the system: Russia demonstrating its enormous growth of its financial strength during this period. This phenomenon has not been discussed much; however, it is of interest because our G-7 partners, failing to turn into a G-8 even after Russia’s successful chairing of it in 2006, obtained a new, rapidly developing and financially healthy target market.
Today’s Russia is no longer the beggar of the early 1990s, seeking to borrow a couple of million dollars for financing its current budget expenses or economizing debt payments using complex programs in foreign debt regulation. Today, Russia is a powerful participant in global financial markets surpassing the remaining G-8 members in a number of macroeconomic parameters.

There are several facts characterizing the financial aspect of Russia’s economy:

1. Since 2004, Russia has been a net creditor in the global economy. According to the Bank for International Settlements, foreign financial assets of Russia’s credit institutions exceeded their debt liabilities by USD 24.1 billion by the end of 2004, UDS 61.8 billion in 2005, and USD 114.1 billion by mid-2006.

2. At the beginning of February 2007, Russia’s gold and hard currency reserves exceeded USD 300 billion. Here, Russia yields only to China and Japan.

3. At the beginning of 2007, the correlation between the state (domestic and foreign) debt and the country’s GDP was below 10% as opposed to 140% in 2000. None of the G-7 members can show such good debt sustainability indicators as Russia. Russia both completely and early repaid its IMF debt and the debt of the USSR to the Paris Club, paying the creditors USD 43 billion. Russia, as any other G-8 member country, participated in the IMF Financial Transactions Plan developed by the Fund for provision of borrowing to member countries.

4. In 2006, financial conditions gave Russia’s hard currency regulators the ability to lift the remaining restrictions on capital flow. Consequently, the status of the ruble as a currency used in international transactions rose abruptly. On January 15, 2007, the Clearstream clearing system included the Russian ruble in the list of currencies used for mutual transactions. On February 5, 2007, Euroclear adopted a similar decision. A year earlier, for the first time in history, CityGroup successfully issued Eurobonds in rubles. The EBRD has already begun granting loans in rubles. The World Bank plans to conduct the first ruble emission in 2007.

5. In 2006, after several years of stagnation, Russia emerged as a large-scale international donor. Newly adopted financial liabilities (excluding the liabilities on writing off the debt of foreign countries) exceeded USD 600 million (cf., USD 40.0 million in 2001). All resources have been targeted in the recipient countries in regard to the Millennium Development Goals in such areas as healthcare, education, and inefficiencies in energy. Russia with its G-8 partners adopted a decision on writing off 100% of the HIPC beneficiary countries’ debt.

While considering the importance of the aforementioned objective data and indicators, we should not underestimate the importance of purely subjective data demonstrating that Russia has been implementing a sensible financial policy which can be trusted both by our G-8 partners and private investors. First, the government has been consistently restraining the growth of non-interest expenditures, despite the rise of strong populist attitudes especially on the threshold of parliamentary and presidential elections. This led to the accumulation of over USD 100 billion to the Stabilization Fund in less than three years. Second, tax schedule in the country is one of the most liberal among market economy countries. For example, the VAT rate is 18%, and personal income tax is only 13%.

The financial policies conducted by Russia gave it the moral right to lay claims to global leadership in this area. While chairing the financial G-8, Russia set forth an initiative for developing the Good Governance Code in Public Finance Management; proposed measures targeted against excess crediting to developing countries experiencing debt crises on behalf of the states with emerging markets; and, finally, on Russia’s own initiative, the financial G-8 discussed the coordination of efforts by the world community in raising the standards of people’s financial knowledge.

It is important to take into account that Russia’s efforts have not gone unnoticed. From this, during its chairing of the G-7 in 2007, Germany set forth an initiative on improving the quality of financial policies toward African countries as one of the most important prerequisites in reaching the Millennium Development Goals and an incentive for the donors in increasing their official aid for development. This proposal directly corresponds with Russia’s initiatives. Further, the financial G-7, which gathered in February 2007 in Essen, spoke in favor of developing the Good Governance Code in international (foreign) loans. Many of those attending the meeting could remember, however, that as early as ministers’ meeting of the Group of Twenty in Berlin in November 2004, that the initiator of these lines had proposed to modernize the document on the principles of insuring stable inflow of capital into developing economies and a fair restructuring of the countries’ debts adopted by the Group of Twenty in line with the policy chosen by the G-7 at present.

In closing, I would like to reiterate that today’s Russia is the most important component of the global financial system and its role is determined not only by its huge oil, trade and monetary flows formed by the Russian economy, but also by the intellectual contribution which its citizens can and are ready to provide for global development. Unfortunately, not all of today’s financial world leaders are able to appreciate (or have the intention to appreciate) Russia’s financial phenomenon.