Palms & Company Document

Black Tuesday

by

Dr. Pyotr Johannevich van de Waal-Palms

Letter to the Editor-in-chief Vladimir Belyakov

Managing Editor: Gennadi Syomine

RIA-Novosti, Zubovsky Boulevard 4, Moscow

From: Dr. Piotr Johannevich van de Waal-Palms

In the Fall 1994 issue of Russian Life, Vladimir Mytarev, RIA-Novisti Analyst, editorializes about a subject that deserves objective reporting.

The October plunge of the ruble to R4000=$1.00 should not be swept under the carpet with the statement "Admittedly, the currency exchange and the market itself, for that matter, are not ideal gauges of a currency's real value. I do not admit to that, nor should any rational person. The market is the only gauge of real value.

First we have to understand that the Moscow Interbank Currency Exchange (MICEX) is a tampered market. Unlike all other currency markets in the world, dollar buyers present their bids for dollars as a group. If the total dollar bids exceed the supply of available dollars, every bidder is asked to bid again, this process continues until the number of dollars bid for, equals the number of dollars available. Then a transaction takes place at that price. At no time does anyone have the opportunity to buy up the available dollars by offering a higher price for them In effect this is not a market but an allocation of dollars to a group of buyers by the Central Bank.

The MICEX does not take into consideration that these bought dollars are restricted by laws which permit their use only for buying and importing goods. "Flight capital" may not acquire these dollars and export them, never to return. These dollars must be exchanged for imports by law. The MICEX is a place where dollars, earned by those who receive export licenses from the government are redistributed to those who can't earn them, because they have no export licenses. Exporters are required to sell 50% of the dollars they earn from exporting, back to the government to assure the availability of some such dollars.

In this manner export licenses control who shall be the favored "Nomenklatura" who shall be the rich Russians. 100% exploitation of those not so favored is impractical. The population has to be supplied with some essentials for consumption. If the Central Bank therefore didn't "fix" the exchange rate by the bidding system the MICEX employs, and didn't support it further by selling dollars for rubles, at that rate, to provide a supply of dollars, there would be no dollars available at that price, and free market forces would send the ruble into a tail-spin and make life simply unaffordable for most Russians. The MICEX is therefore not a market for determining the exchange rate, but rather a dollar "give-away" program, restoring to the general Russian population some affordable means of sustaining themselves.

Mr. Mytarev further states, "An exchange is where buyers and sellers of hard currency converge to form complicated combination, but the resultant exchange rate does not necessarily coincide with the world rate." Here he reveals, although obscurely, the existence of a "world rate" but fails to mention that dollars delivered outside Russia for rubles paid inside Russia trade at such world rate at 20% to 40% above the exchange rate "fixed" by the MICEX. It takes more rubles to buy free-market dollars.

In effect people who want free trading dollars, without restrictions upon their use, recognize that such dollars do not exist inside Russia. Russia has created laws to prevent free use of such dollars. While the MICEX rate for Russian importers is supported artificially by the Central Bank at R3200 for $1.00. People are willing to pay R4480 for a dollar delivered outside Russia. They can well afford to with profits made from buying Russian raw materials, such as oil, at 25% of world market prices in Russia, for rubles, and then exporting and selling them for world market prices and returning 50% of such profits to the Central Bank for rubles.

Mr. Mytarev states.."The dependence of the domestic market on the exchange rate was thus shown to be weak". The domestic dependence upon the exchange rate is totally eliminated by government subsidy, so that some portion of the export earnings of the Nomenklatura may be used to subsidize the "poverty level" income of the general population. The MICEX has nothing at all to do with exchange rates. It is a place where green stamps are exchanged for real money at the "company store" in order to prevent starvation. It is also the place where the income level of the population is controlled to prevent anyone from making a real living, who is not a member of the Nomenklatura. That prevents civil unrest. It has to be done to prevent riots.

Mr. Mytarev goes on to say.."Moreover, the growth of the dollar/ruble exchange rate in Moscow left the international exchanges unchanged". What this really means is that running the printing presses in Perm 24 hours per day causes inflation. But as long as the supply of rubles allows prices in Russia to stay below world market prices, the exporters can continue to make a profit without the general population participating in the GDP. Accordingly the MICEX exchange rate is adjusted to maintain no more than 30% of the population below the poverty level.

The international exchanges continue to ignore this game on the MICEX by trading in rubles at world market prices 20 to 40% more rubles to the dollar. In this manner Russia has found the formula for maintaining a socialized system with an elite Nomenklatura under the guise and misnomer of a market economy. Arbitrary taxes further equalize any discrepancies in the plan. Any Russian economist, worth his salt, understands that the dollar's rising exchange rate is unnatural rather than natural and beneficial not for the Russian economy in general or the population in general but for the licensed Nomenklatura exporters.

The dollars that are "released" into the domestic economy through "allocation" do not draw appreciable ruble funds from the domestic market. The Perm printing presses see to that and regulate the average wage quite nicely. Domestically produced commodities do not compete against imported goods and are not intended to. Commodities are exported. Finished goods are imported. The productivity of foreign workers is such that Russian producers of consumer goods cannot produce them competitively even at the low monthly average wages. Mr. Mytarev is right on one score. Inexpensiveness of imported goods initially shocked Russian producers and still does and will continue to as long as domestic policy denies the population access to capital for improved tools of production.

The statement that the Central Bank did not intervene is an outright misrepresentation. It was a helpful corrective measure to remove R4000 from the economy for every dollar instead of R3000, just at the time it became apparent that some additional dollars had to be "donated" back into the domestic economy. Having accomplished that, the Nomenklatura also wanted to redeem some of the rubles it had received for its contributions of dollars to the Central Bank, to finance this activity, and so the ruble went back to R3000 the next day.

The leap from R3000 to R4000=$1 was not an astronomic leap, as Mr. Mytarev characterizes it, but rather a temporary glimpse of the actual world market rate by the MICEX, that allowed the Nomenklatura to receive full market value for its dollars. When dollars are in the hands of other Russian citizens, then the MICEX, well controlled and fixed, becomes the internal value of the dollar in Russia. These cycles will continue.

They are not unlike the Federal Reserve Bank's control of the money supply in the U.S. The difference is that in Russia, ownership of money is transferred and controlled by such actions as well, while in the United States, ownership of money does not change hands. That could well be the distinction between democratic capitalism under rule of law, and open-market socialism in Russia under rule of the elite.

Sergei Dubinin, the former finance minister of Russia undoubtedly knows that the ruble will stop on the MICEX exactly where the limited controlled trading volume of the dollar, with controlled demand in the bidding system, is set to stop, unless of course the printing presses and government credits lose their perspective entirely, which may well occur in the not too distant future. But so far all goes well with the Nomenklatura, who have amassed $260 billion dollars in bank accounts outside Russia using this very well oiled system.

Banks are not keeping the dollar up nor are they capable of it. Only the release of forfeited dollars of exporters by the Central Bank keeps the dollar down officially. Banks have long realized they should acquire dollars anyway at any price and export them to protect their capitalization from devaluation and inflation, and they do it. Most foundation capital of Russian banks is now in dollar denominated accounts outside Russia. If the Central Bank let the dollar go up, it would be the end of the ruble as a redeemable green stamp. The abundance of rubles on the domestic market, thanks to the printing presses in Perm, does not keep the dollar up, it forces the ruble down.

Does containment of inflation really result in slumping production and lowered demand as Mr. Mytarev suggests? Containment of inflation would encourage production because in would encourage ruble denominated investment. Lowered domestic demand is caused by eroding purchasing power caused by a combination of inflation and devaluation, which raises the cost of imports.

It becomes apparent upon examination that there are two economies in Russia, the economy for the Nomenklatura and the economy for the population as a whole. Russian policy explanation has a hard time finding one explanation for both systems. The ownership of the heaps of unspent rubles is not that of the population, but rather of those in control of the printing presses and the industries to which these rubles are "donated" through the government budget, identified as "investments". The public is forced to spend 95% of its income on subsistence and cannot save, nor would it as long as inflation wipes out its savings.

Joining in the Disneyland of destruction-economics and rape-economics are the new Russian suede shoe boys who take advantage of the economic illiteracy of the public by convincing them that commercial activity can make 2+2, minus 100 in taxes, equal 50. The acute demand for hard currency is not what causes a rush to buy dollars. The relentless printing of rubles is what causes them to cease to be a currency and requires an ever increasing "donation" of dollars by the Central Bank to redeem sufficient quantities of worthless rubles to enable the population to feed itself.

There is no will among the Nomenklatura to weaken its own position to come to the aid of the population. Their only action has been to redistribute further, an ever shrinking left-over pie among the clamoring population, which doesn't understand the cause of their exploitation. A tough fiscal policy, while necessary, is not going to solve anything, until the Nomenklatura returns the rest of the stolen pie. Liberalized trade also means letting the population in general earn money. It isn't going to happen soon. Bringing domestic prices in line with world market prices implies raising salaries to maintain domestic income levels at at least the poverty level, and that would mean sharing the comparative wealth of Russia equitably with the working population. It sounds good but the Nomenklatura aren't interested in that at all.

The abundance of free "printing-press" rubles is not at "the core of speculation" they are the rationale for sensible action to protect private property. Russia is not one country with a government representing all interests. As long as special interests rape the general population, it is to be expected that this population will attempt to survive. Calling that "speculation" is an insult to all Russians.

Foreign Investors do not have any more speculative advantage than anyone else with money. Anyone who earns enough to eat and have something left over to invest, has a speculative advantage because he can buy fixed assets, which are immune from currency devaluation and will rise in value with inflation. As long as Russian policy keeps the Russian population poor they are at a disadvantage caused by the government.

Whether "foreigners" invest in Russia or not, Russia already is tied to the international global economy. That happened the minute international relations started. The thought that there are purely domestic reasons for the fluctuation of the dollar/ruble exchange rate is wishful thinking and an illusion. World market values determine the value of Russian oil and all other exports as well as its imports. Unreal domestic wages do not influence the value of goods. The domestic value of such goods is artificially contrived by the Central Bank through its manipulation of the exchange rate on the MICEX to enable the population to buy products below world market values. This is necessary because their work is compensated for a below world market values. This is the policy of economic dictatorship and exploitation that is the substance of Russian domestic economic policy.

Mr. Mytarev says "External factors so far have had little influence because the current level of the Russian economy's dollarization is relatively low". Mr. Mytarev you are misleading the Russian population with such nonsense. Think this through. "Measures envisioned by law" to counteract survival ( which you refer to as speculation) are immoral and unworthy of a government which receives its just authority from the governed. It is little comfort to those who bought dollars for R4000 rubles, that the prices of goods in the stores have remained unchanged, when they must now sell their dollars for R3000.

As long as the government maintains control of the exchange rate and denies free ownership of other currencies to its citizens, it holds the power of life and death over the entire Russian population. This is a power the government has abused and continues to abuse. So far it has been successful in creating a million Russian millionaires at the cost of creating 149 million exploited Russians.

Was "Black Tuesday" Really So Black". Yes Mr. Mytarev , it was and still is and will continue to be until some sort of social/economic justice prevents survival efforts from being characterized as speculation by those with absolute power to make the laws that govern all Russians.

Comment To the editors:

Freedom of speech is essential and useful. It permits a dialectic that educates. It is important that the right exist to express every viewpoint. It is also important that informed statements reach the population.Russia's economy will improve when its policies are designed to create improvement. It is very important to the welfare of the Russian population that this happen as soon as possible. I hope that Russians will soon be able to understand, whether they are being fed facts or nonsense. It is difficult to fix something if you do not know what is wrong with it. A great nation is one that provides the greatest lifestyle for its citizens. Russia has the potential to do that. It is tragic that it do not make such possibility a reality.

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