24/10/08
Andrei Illarionov, the former consultant to the Russian President, and now one of the strictest Kremlin critics, the officer of Cato Institute in Washington, considers that current financial crisis is natural and limited in scale phenomenon and it can’t lead to global economic depression.
Alexander Guravlev, the Washigton correspondent of Russian BBC service, had a talk with Andrei Illarionov.
BBC: Andrei Nikolaevich, recently the governments of leading industrially developed counties, beginning with the USA, are undertaking large-scale measures for saving financial institutes with spending colossal means from their budgets. Do you find these crisis management measures reasonable?
A.I.: No. Unfortunately, the word “crisis” is used widely either by press, or by public at large, or by politicians to describe mixed phenomena. Indeed, speaking about classical definition of economic crisis or recession, it means decrease of gross domestic product during two quarters running. This is observed neither in the USA’s economics, nor in the most European countries except Spain and Italy, nor in Russia. And according to the results of the first two quarters of the year there is no economic slump in the majority of countries.
The latest forecasts of International Monetary Fund say that in global scale the growth rates of economic activity will account about 3,5% in 2008, that nowise corresponds with the definition of the global recession, while they are to fall lower than 2%.
BBC: So now there is no crisis at all?
A.I.: Certainly, there is a financial crisis, but here we are to be clearly aware in what we mean by it. For example, in the USA there are neither monetary, nor budgetary crises. The government is able to finance budgetary deficit as before. Dollar rate doesn’t fall, it even goes up. But in return we have the crisis of stock market connected with the decline of most exchange indexes, and it is quite real. And the credit crisis, caused by drastic rise in costs of interest rates on the market of interbank credit, leads to the impossibility of obtaining a credit on the former terms.
BBC: And if we speak about Russia?
A.I.: Of course, in Russia there is the stock crisis, and that is in much deeper and harder form than in the United States. In the USA the stock market has fallen by 32% since 19 of May, the highest point of this year and in Russia it has fallen by 74%. This is an essential difference.
We also observe the crisis of liquidity in Russia – there the interbank crediting rates have jumped sharply. In addition, there is the crisis of corporative debt in Russia. The problem is that big Russian companies and banks carried out massed holdings in the foreign financial markets using relatively low interest rates, the growth of its capitalization and, including the fact that they pledged the value of their shares in security for received credits.
When the cost of these shares began to fall, it was found out, that hypothecation value of these credits had quartered. It is natural that creditors began to demand from Russian borrowers either increase in pledge, or providing extra loan guarantees. And it cornered Russian debtors.
Thus now we see three crises in Russia in contrast to two American breakdowns: the stock one, the credit one and the crisis of corporative liabilities.
BBC: How do you estimate the danger of transition of the current phase of financial crisis into the wider global depression of the world economy?
A.I.: The credit or stock crisis does not absolutely necessarily lead to decrease of business activity on a world scale, what we got accustomed to define as “economic crisis”. Let’s say that in 1987, when Dow Jones Average fell sharply, there was no drop in growth rate in the American economy. Or in 1998, when in Russia the default really occurred, it led particularly to the bankruptcy of a big American credit company LTCM, but did not result in recession neither in the American economy, nor in the world one.
BBC: Now the comparisons of the present situation with the conditions of 1929, when the stock crisis led to more global economic recession which continued for 10 years are more often heard.
A.I.: It’s perfectly true, and the stock crisis of 1929 appeared so hard because the American authorities that is the administration of recently elected President Hoover proceeded from delusions about the way the economy worked. They began to interfere in the economy with increasing state expenses and taxes and with enacting state regulation. And as a result a comparatively small decrease turned into the biggest economic catastrophe in the US history.
BBC: Do not the actions of the current Bush’s administration follow the same model?
A.I.: We should admit that actions of most western authorities and – in far greater degree – of Russian government transfer quite sickly stock crisis, in which we witness, into the category of economic catastrophe. And it happens in spite of measures for rescuing economy, which one by one country undertakes. Though the pace of slackening economic activity have especially gone faster for the last two months, after August 2008, when active attempts of such state interference were being made.
The question is that stock and credit crises play a role of clearing storm in economy. They sweep away from market ineffective investment projects that appeared as a result of borrowing cheap credits. And the state complicates this treatment process by its interference and causes only lead-time of crisis.
BBC: But such considerations can’t be a secret neither from Henry Paulson, the Mister of Finance of the USA, nor from other economists and financiers who consult western governments now. How then does absolutely another position triumph, the position of massed interference of the state into market mechanisms?
A.I.: There exist several explanations of such behavior of the authorities. One school proceeds from the idea about general lack of professionalism and incompetence of power elite. Another, which is closer to me, is called “the theory of social choice”. According to it, the representatives of governmental authorities make decisions, relying not on nation’s and country’s interests, but being guided by the state of political affairs among the political class. Of course, Henry Paulson or Aleksei Kudrin read Adam Smith and Friedrich Hayek, but now it is uncomfortable or unprofitable to follow their advice according to quite a number of reasons.
BBC: The peak of flight of foreign capital from Russia has coincided with the beginning of Russian-Georgian conflict. Is there the direct connection between these two phenomena?
A.I.: Such flight has begun much earlier and has been caused by certain decisions of Russian authorities in respect to economic controversy in the company TNK-BP, or in relation to the project “Sahalin-2”. But it is absolutely obvious, that the biggest slump in capitalization of Russian stock market took place on the 8th of August. And the next, very substantial fall occurred on the 26th of August, when Russia recognized independence of South Ossetia and Abkhazia.
Martial rhetoric and warlike actions of the Russian authorities, for example, the statements about willingness to a new cold war, the policy of closer relations with Venezuela, the decision about aircraft fleet formation, conducting big military maneuvers, - have sharply negative impact on the behavior of Russian stock markets.
BBC: Now Russian authorities spend enormous assets from Stabilization Fund on pegging the ruble exchange and on pouring of money into banking industry. For how long will it be enough?
A.I.: Russia has considerable bankroll, and it became a result of that policy which I had suggested to take in 2001, when I became the adviser to President Putin. That’s why at least in short-term prospect the stability of the regime is more or less guaranteed. Another question is that today it is not possible to predict the dynamics of developing crisis phenomena.
Only two months ago I considered that the credit crisis will quite soon lead to replacement of inefficient proprietors by efficient ones, it will relieve the tension and then economy will cut the strings, which squeeze it now. But after so concentrated interference of the authorities into market mechanisms either in the West, or in Russia, we need a new analysis of what is going on, and this is what we’re doing, particularly in Cato Institute.
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