A new banking crisis in Russia cannot be ruled out; the reason for it is that consumers do not realize the value of money, which is exploited by banks, according to Viktor IVANTER, director of the Institute for Business Forecasts of the Russian Academy of Sciences. The academician told in an interview for NBJ about possible scenarios for the Russian economy and the role of banks in it.

NBJ: Mr. Ivanter, many experts currently believe that the economy has developed huge demand for money. Can the Russian banking system satisfy this demand and on what conditions? And another question: having analyzed the structure of the economy, can you be sure that Russian companies are able to repay their loans (taking into account all the circumstances, such as corruption, high costs, outdated equipment and little demand for their products in the market)? If not, then are banks doing the right thing by not providing loans to the real sector of the economy?

V. IVANTER: In a monetary economy (and the Russian economy, despite all objections, has long become both a market economy and a monetary economy), any development starts from the demand for money. This demand for money, in its turn, arises because entrepreneurs want to do something, and consumers want to buy their products.

The demand for money is an indicator of a normal development of the economy. If there is no such demand, it is what we call a crisis. It was exactly the case in 2008-2009: people stopped buying cars not because they could not find the money, but because they thought that it was a risky investment, having no idea about how they were going to pay back the debt, what the gas prices will be, and so on. Since entrepreneurs limited their production during the crisis, they did not need much money as well. And so the chain continues. Therefore, what happens is the reduced production and consumption, and what we see on the surface is the reduced demand for money.

In a normal market economy, demand for money occurs in two cases: when you are developing and when you stopped developing. In the second case, the demand for money is also quite big, because you have to pay back your loans, pay to the employees you want to keep, and pay the taxes. In other words, you have to do everything not to lose your capital. The recent crisis was different in that the demand for money was largely due to the costs to maintain the capital. The reason for this is that many of Russian large corporations obtained loans outside Russia, pledging the shares of their key businesses. Due to the reduced sales they became unable to pay back the loans from their profits and started looking for additional sources of money in order not to lose their assets.

Now the crisis is over. Only two types of people speak about stagnation now: those who have never seen the statistics and those who think that if they, their friends and relatives do not take part in managing the country, the situation can only be bad.

NBJ: What type does Academician Aganbegyan belongs to?

V. IVANTER: It is a completely different thing here. Abel Aganbegyan is an advocate of high quality of growth. From the point of view of this increased demand, slow structural changes with not so high growth rates are indeed more like stagnation than development. However, this does not negate the positive economic indicators.

Going back to purely quantitative indicators, the economy indeed grows, and in some cases grows fast. Take the processing industry: in 2010 it had double-digit growth rates of the volume. Of course, the absolute level after the crisis was small, but this still shows that the economy restores to normal.

In general, economists split into two groups during the crisis. The “cata-strophists” promised all kinds of terrible consequences, such as that the USD exchange rate will be 60 or even 80 rubles, while the oil will cost 10 or 20 dollars per barrel. Nobody remembers their names now, but back then they got more attention than dull experts who were trying to explain that such outcome is hardly possible. There were also optimists who said that Russia will be reborn after the crisis. Why would it happen? Re-birth requires innovation, and innovation is possible only through large-scale investments. But nobody invests into a collapsing economy - this is unreasonable. Overall, we are the same after the crisis as we have been before it.

This is not so bad if we answer 'yes' to another question: have we learned our lessons from the crisis?

“WE WERE SAVING CUSTOMERS, NOT THE BANKS”

NBJ: Who should have learned their lessons, what lessons and have they learned them?

V. IVANTER: These are economic agents -the government, the business community and the people. What conclusions were made by the people is still unclear. People are trying to understand whether they will get a new car every three, five or ten years. Each of these answers means a completely different economy. How often will they get a new freezer, a new TV set and so on? You cannot order them to get a new product sooner. It is now important to understand to what extent people will use their own savings and to what extent they will use loans.

Next question: what will be the government's policy? The government has promised to develop the aviation industry, shipbuilding, power machinery construction, atomic industry, and wood processing. It will build new roads and railways. If these promises are implemented, businesses will have wide opportunities. Take civil aircraft building, for instance. We need it as long as people are going to fly. But this requires a larger income for the people. In Soviet times, you had to obtain a special permission to go to a business trip by train rather than by plane. Now the situation has reversed. In a word, the whole idea about aircraft building will work only when there is economic growth and demand for money.

NBJ: So banks are taking risks when they provide loans to companies without governmental guarantees?

V. IVANTER: Let us remember what we did with the banks during the crisis. We pumped money into the banking system. They said that they were saving the banks, and then followed an explanation of how banks are the blood vessels of the economy. I say that the motives were different: we were saving customers, not the banks. We were saving both the deposits of private customers and the assets of legal entities (since the accounts of enterprises contain the circulating capital, including the salaries of the same private customers). There was no other way, even though now people say that it was bankers who were saved. By the way, in 1998 banks were not being saved, so the customers suffered a lot. Have we seen any bankrupt bankers then? No! It was banks who were bankrupt, not the bankers. In other words, by refusing to support banks for purely formal reasons, we harm not so much the banks as their customers. During this crisis, we have managed to save most of the banks and it was generally the right thing to do.

Another question is whether we did a good job at saving them. No! It was a failure. Why? For example, the military always have plans on how to use their reserves. Whether bad or good, but they have these plans, and military headquarters know how to handle their reserves. Our financial authorities had reserves, but no plans on how to use them. They had to invent something on the spot, taking great losses.

NBJ: Were there such plans in other countries?

V. IVANTER: Direct comparison is impossible. In other countries, this system has been tested for centuries. They failed one time in 1929-1933, after which they are more or less prepared for a crisis and know what to do.

Another issue. They say Russia ranked 146 in some international rating, and this is very bad. But what we are really worried about, the rank or the disregard of the law?

NBJ: Do you mean corruption?

V. IVANTER: Yes. Even though the corruption is easy to fight in a way, and it can be eradicated instantly. Don't give bribes, and there will be no corruption! As for the ratings, even we in Russia do not know the average bribe for a police officer. How can an analyst in New York who creates this rating know this? And why is the West suddenly so active? Was there no corruption in the 1990s in Russia? When were the kickbacks invented? And secured auctions?

NBJ: Back to the banks. You said that they were supported in a wrong way.

V. IVANTER: Of course, how else can it be evaluated? Banks were provided with money, they converted it into foreign currency, but provided no loans for the real sector of the economy. What if the money was given directly to the real sector? They would also exchange it for a foreign currency. They had nothing else to do - there was no demand for their products. What should have been done is not to give money to banks but to limit the loans to enterprises. As soon as you reach your limit, you cannot borrow anymore. But we chose the simplest way. However, it was done in good faith. Banks had to be saved, because many customers became insolvent. As a result, we have saved the banking system. Now we have to make it work.

“IT WILL RESTORE, BUT NOT INSTANTLY”

NBJ: How do we achieve this? It is obvious that banks are not willing to lend to the real sector, referring to the lack of high-quality borrowers. The money in Russia is expensive, so solvent corporations already borrow in the West again.

V. IVANTER: At least our banking system handles payments well. In the 1990s, we have suffered an acute payment crisis and we know how bad it is for the economy. Now this problem is solved. There are a few deficiencies, but not more than in other countries.

Our problem consists in the lack of large-scale lending to the real sector. It needs long-term money that the Russian energy companies or the government have (as the taxes from the same energy companies). But where do we keep this money? In New York, in the form of currency reserves!

The energy companies themselves have no problems with getting loans either in Russia or in the West. Thus, we only have to stimulate loans for the processing industry. This is where long-term money is needed. The government should give it to banks. But not as a gift. Theoretically, the system to solve thi problem is already established. We also have a refinancing rate. But no refinancing yet…

NBJ: Suppose we will have it.

V. IVANTER: The Central Bank will provide loans against a set of obligations. The question is what kind of obligations and what stands behind them. Therefore, large projects should be analyzed by experts. The idea is to distinguish a perspective business from a failure. There should be professional experts who can tell what is efficient and what is not when a production project is developed and discussed. Experts do not have to work in banks; it is enough to have companies where such analysis can be ordered.

NBJ: Does the refinancing idea require any additional governmental analysis?

V. IVANTER: No. The bank gives its own money, so it is up to the bank to verify. The Central Bank has to check the bank in the area of its own competence, to prevent fraud.

NBJ: Vneshekonombank and Eurasian Development Bank complain that most applications from companies do not contain even any business plans, just a bare idea. Where do you suggest companies should find experts and money to create such projects?

V. IVANTER: True, a business plan is not something cheap to create. We have also lost the researchers in this area and the whole planning industry. There is hardly anyone to order a production project from.

NBJ: As is known, project design companies remained only in the areas with public procurement. And since they try to suit the governmental requirements, the quality of their projects is poor.

V. IVANTER: Well, as concerns trying to suit the governmental requirements, this is pseudo-liberal nonsense, mostly. The key problem is that earlier all production managers were engineers and knew technical standards. Now managers are mostly lawyers and economists. But the Ohm's law and the strength of materials theory are still in effect, and you can't replace them with short-term financial efficiency. An example is the accident at the Sayano-Shushenskaya hydroelectric power plant. It is not just the industry that will fail without engineers. Banks need engineers, too, otherwise they cannot figure out who to give loans to. The USSR was lucky in the 30s, when due to the large-scale crisis we were able to get very cheap German and American engineers who have fixed everything together with the remaining Russian specialists. Then we created super-universities to produce our own high-quality specialists. Nearly all of the graduates now moved to the West, though. But these universities still exist and provide good education. This base can be used to restore a lot, though not instantly.

NBJ: Russian financial organizations use the experience of development banks all over the world, which mainly provide tied loans.

V. IVANTER: Yes, Russian banks provide tied loans, too. These are mainly to pay the work which has been already completed according to the submitted documents. The thing is that we do not yet have large-scale experience of long-term financing via special-purpose development institutions, the technology is not tested enough.

THE CURSE OF RAW MATERIALS IS A MYTH, NOT A FACT OF LIFE

NBJ: In your opinion, what should the development institutions do: bring non-liquid enterprises with no demand for their products back to life, or provide loans to potentially effective projects?

V. IVANTER: They should do the same as they do in the rest of the world. People are saying that Russia is dependent on raw materials, there is this “curse of raw materials” on us… I wonder if there is a country that would say that it would be awful to discover oil and gas in their territory.

During the peak of the crisis in 2009, the oil production decreased only 1.5%. Oil export is the most stable type of export in the world. How did the crisis affect the budget? Well, the revenue decreased. But where did we put the surplus when we had more revenue? We sent it to Americans to keep it there. Let the Americans worry about decreased flow of money from us, why should we worry?

Think about this: $15 per barrel is the average cost to produce oil, including transport. Certainly in Saudi Arabia it is even lower - $3-5 per barrel, but even with the price as high as $15, selling oil at $40 is great! Now, of course, if the prime cost is $40 per barrel, any investment into the Arctic shelf is unreasonable. But if the price in the next few decades remains at $80 per barrel, we will explore the Arctic shelf. The problem of the oil prices is more of an investment choice problem than a budget problem.

What is our dependency on raw materials then? Our dependency is that we import a critically high volume of food, equipment and technologies. Yes, we will always import exotic fruit and vegetables, this is normal. But as soon as we can produce 70-80% of the food demand, we will no longer depend on anyone. The same applies to machinery, including defense equipment.

NBJ: Are you then confused about the priority industries declared by the government? Does it make sense to pump money into dozens of aviation enterprises if there are neither airplanes produced nor demand for aviation? It is efficient in the USA, but the government there invests into technologies and materials, and gets obvious return on its investment.

V. IVANTER: We have different aviation here and in the US. Any R&D in America is ordered directly, both civil and military, about 80% of them. Soviet civil aircraft were always developed basing on military planes, which had more negative than positive consequences. Now we are funding about 20% of R&D demand for military projects or dual-use projects.

Just like before, the results of R&D are passed to civil aviation with difficulties. In my opinion, however, there is some success: Superjet, a civil airliner made by KNAPO with French-Russian engines is already in production and will be quite competitive.

NBJ: When the government decides on the priority industries, does it consult the Russian Academy of Sciences? For instance, have the President or the Prime Minister asked you about areas of possible development?

V. IVANTER: I worked both with the President's administration and the government, communicating more with the government. The problem is not that the government has no ideas about areas of development. They have these ideas, and quite good ones. But they are difficult to implement. In other words, we go back to the issue that banks need high-quality projects to finance these ideas.

“BANKS WILL ESTABLISH REAL CONTROL OVER SPENDING”

NBJ: During the crisis, banks have accumulated a lot of non-core assets. Among them are mortgages, many of which have considerably lost in value.

V. IVANTER: Loans for the purpose of residential construction is a problem per se, raised by Dmitry Medvedev (President of Russia) many times. For instance, creating a bank now is a complicated task. Licenses, experience, capital requirements etc. In order to accept deposits from private customers, you also have to join the deposit insurance system.

Now have a look at how property developers treat the money of their customers. You have a title to land, and you declare that you will build a house in this place. Now you can easily collect money from people and do whatever you want with this money. After this, you have protests of defrauded customers, but no one is held liable. This is utter nonsense! Why did this system arise in the first place? Construction companies needed money to start construction. But banks are not going to give them money for free, they need interest. Meanwhile, people give them money with no interest hoping that the house will be completed in a year. This method, of course, is much more suitable for developers, since they do not have to seriously prove their reliability to anyone. Nobody knows how and why this is still allowed by the law.

NBJ: Who did you ask?

V. IVANTER: For instance, State Duma Deputy Pavel Medvedev agrees with me that it should be stopped. Selling unfinished apartments should be prohibited. Anyone should be able to have a share in any private project, but then the person should know all the risks and realize that they will not be compensated from the budget for their losses.

NBJ: If banks get involved into construction, will the real property cost even more than now?

V. IVANTER: Real property will get cheaper! If apartments in Russia were sold with a 8% margin, then yes, the involvement of banks would lead to higher prices, since the interest rate now is higher. But with today's average margins in residential construction, banks will drive the prices down, since they will watch the solvency of the borrower to protect their margin and will establish real control over spending.

Buyers, in fact, cannot control anything. But a bank will make sure to control the developer: it will not give the money for the foundation of the building before they dig a foundation pit. What happens now is that the developer gets the money, but instead of starting the construction, it just pockets some money, uses some money for bribes, and only after it collects the money for the next building will it start the construction of your building. If a bank controls the process, this scheme will be impossible. The bank will pay for the construction work that has been completed. This alone, of course, will not improve the quality of the construction. But at least we will get real control over the money.

I am against inventing anything unexpected here. Are we going to fund residential construction in our country? We are! And the bank doesn't care where the money comes from. Let it be the money from the budget. If you are going to build houses for the military officers, pass it through the bank. In any case, the bank will control the developer so that it cannot overstate the prices, because it is unprofitable for the bank. Meanwhile, the Central Bank should watch the banks so that they kept their revenue at adequate levels. Here we get back to the issue of interest rates and the risk of double dip recession.

“THIS AMOUNT OF INTEREST CANNOT BE REPAID NOW”

NBJ: Are there reasons to fear a double dip recession?

V. IVANTER: See for yourself. A bank provides loans at 20% per annum. What industry in the Russian economy can yield over 20% per year? Unless you deal in drugs or girls, of course. There are no such industries. This is why when a bank provides a loan to a legitimate business at 20%, it is obvious that it will have to restructure this loan later. This amount of interest cannot be repaid now. Just cannot! The bank may object: we've got the collateral! But what do you do with it?

You cannot sell it for the money you need.

Remember the wild 90s. Only a bankrupt or an adventurous person could take loans with 80% interest rate. There were no other options. This is why the default was predictable and logical. The same happens now: banks should realize that the money borrowed at 20% per annum will not be repaid.

NBJ: Why do they provide loans then?

V. IVANTER: This is all a silly maths game. During the crisis, banks have borrowed at 10%, 15% or even 20% per annum, and no they have to give loans so that not to go out of business.

NBJ: What's your recipe?

V. IVANTER: After the crisis of the 1930s, passive rates in the US were controlled for 10 years, and very strictly. Banks could not offer deposit interest rates over a certain ceiling that was determined by the government. The control over the passive interest rates is a very powerful tool.

NBJ: In Russia, the bar is set by state-owned banks. In your opinion, the minimum interest rate of 11% for mortgages offered by Sberbank is a low or high interest rate? Do you believe commercial banks when they say that state-owned banks are engaging in dumping and they are hardly making the ends meet?

V. IVANTER: I do not believe in impoverished bankers. As for the rates, my opinion is as follows. On the one hand, Sberbank decreased its interest rates and all major banks followed it. This is how a certain balance is formed. On the other hand, Sberbank's 11% for mortgages is crazy. A reasonable person might borrow on these conditions to buy a car, a freezer or a TV set. But not for the apartment, the income is too small. The problem is exactly in the income, this is why mortgages are underdeveloped.