Source Pravda.Ru

Illusion of Reserves

We won’t notice anything: our gold and FOREX reserves are already in other people’s pockets
It might seem that the Russian government is truly proud of the Central Bank’s speedily increasing gold and FOREX reserves. Of course, the reserves are some kind of a guarantee against any economic upheavals. When necessary, the government has a right to make use of the reserves. In fact, it’s almost never mentioned that the reserves are stored not in Moscow, not in the deep armored depositories of the Central Bank guarded by special purpose troops. And it is likely that at the moment when the Russian government urgently needs the reserves, someone may say Stop! as it will turn out that the reserves are frozen until particular “clarification” is done.

The RF gold and FOREX reserves reached a record showing of about 48 billion dollars in January. The reserves are mostly invested in the government securities of Germany and the USA, Deputy Chairman of the Bank of Russia, Konstantin Korishchenko said in an interview to Russia’s newspaper Trud. He says that a smaller part of the reserves is on bank accounts of the USA, Great Britain and Switzerland, the banks are with a very high rating. The Russian Central Bank prefers foreign government securities “as they practically don’t differ from deposits regarding the earnings yield, but the securities are of a higher liquidity.” The earnings make up a bit more than 2-3% at that.

On the one hand, it may seem that the situation isn’t dangerous as all: it is quite reasonable to place money where it will return a sure income. But this is good in case if the situation in the world is quiet. But currently, the situation is quite different. The USA is obviously experiencing a crisis, not to speak of Germany, where the crisis is evident. By the way, the whole of the world is already anticipating a war. And nobody knows whether seizure of Iraq will put an end to this war. What was the reason to store the gold and FOREX reserves somewhere far from Russia?

It is quite logical that the Central Bank bankers are thinking in a manner different from other people’s. The way of their thinking is even different from that one of commercial bankers. Konstantin Korishchenko agrees that this way of money placement is unprofitable for commercial structures, as the assets are not paying. However, the situation is different concerning the state bank. “We keep such gold and FOREX reserves because they “earn” trust to Russia’s economic policy, the trust that is mostly determined with the currency volumes on the Central Bank’s accounts.”

Indeed, as soon as we give the guaranteed reserve to foreign countries, they immediately treat us respectfully. Of course, they think that Russia has no place to go in this situation. When problems arose in the relations between the Arab nations and the USA, they immediately started withdrawal of their assets from American banks. Why? Because today nobody can say for sure how the situation may develop tomorrow. And assets kept in the banks of such an aggressive country as the USA may one day become not only unobtainable, but can be even used against the owners. It seems that the Russian authorities are not scared with this prospect.

What is more, it turns out that Russia’s gold and FOREX reserves are open investments in the American economy. This situation is probably not strange at all from the point of view of a banker: money is always kept where it is safer. But average Russian citizens don’t approve of this point of view. We know that the bank system is poor, that simple market mechanisms don’t work and that officials may make off with any sums of foreign currency. Isn’t it possible that the gold and FOREX reserves were hidden somewhere so that nobody could steal them? It is impossible to imagine how Russia would change if the whole of the sum was invested in the national economy. It would make the developed countries “trust us without any billion-size pledges.” The life of ordinary people would be different as well. It seems that it’s currently an inconvenient moment for this scenario. In the same interview, Konstantin Korishchenko said that gold and FOREX reserves were no guarantee by themselves. The state runs economy with the help of two basic instruments: budgetary-taxation and monetary and credit politics. That is the reason why, he says, a crisis may occur in the country irrespective of the currency rate. Contradictions between both politics often become the reason for a crisis in the country.

Sometimes a crisis may be the result of some exterior reasons. For instance, oil prices may drop; if it happens, the situation will repeat the 1998 default and people will rush to exchange rubles for dollars. The banker said in the interview that the Central Bank has got enough dollars to exchange all rubles, and some amount will even remain. In this situation, the ruble amount on the market will suddenly reduce, the demand and the price for rubles will increase. But these problems will have no effect on ordinary people, but only on banks and enterprises. The Central Bank official admits that Russian people may even not notice this situation, as majority of Russians don’t live on credit. The people will perceive the changes only if they entail closure of banks and stoppage of enterprises. Konstantin Korishchenko says that the system of consumer credit is weak in Russia because of the deficit of banks and shortage of their capitals. And interest rates are still too high for the population. But at the same time he is sure that the situation cannot be different. The high interest rates demonstrate the price growth rate and the actual value of a credit.

The banker says that the problems are rooted not in the Central Bank’s policy, but are explained with the absence of structural reforms, the labor market reform first of all. If reforms are carried out in this sphere, wages will be actually indexed, people will have savings and will be eager to deposit money in banks, etc. “When you know that under the highest inflation your wages will be indexed, you will be able to draw your plans with respect to taking loans; it makes no sense when there is no indexing,” the Central Bank Deputy Chairman says. Until the problems are not settled, all talks about mortgages and low interest rates, like in the West, are just useless slogans. That is why Russia’s gold and FOREX reserves are better to remain abroad, until considerable decisions concerning these problems are not made. So that they can be safe.

Ahtyam Ahtyrov PRAVDA.Ru

Translated by Maria Gousseva

Read the original in Russian: http://economics.pravda.ru/economics/2003/7/21/61/5731_Gold.html

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