June 8, 2015
MGIMO professor, head of Russian Economic Society, editor-in-chief of “Our Business” (“Наше дело”)
Translated by Kristina Rus
German Gref’s Sanctions Against Russia
Who controls the banking system of Russia?
On May 29, 2015 an annual meeting of shareholders of the main Russian credit institution — Sberbank, was held. German Gref, the head of Sberbank, stated at this meeting that this credit organization will not be represented on the territory of Crimea and Sevastopol, because Washington introduced sanctions against Russia and prohibits any commercial structures to work on the territory of the “annexed” peninsula.
For some inexperienced people such a statement may seem shocking. After all, it’s “our dear” “Sber”, and not some “Goldman Sachs”. Citizens, even far removed from the world of finance, believe that Sberbank is:
- a Russian organization;
- a state organization;
- organization that is subject to the laws, regulations and other control signals, emanating from the state bodies of Russia.
However, it is not so simple. For example, Sberbank is mistakenly called a public lending institution just because its main (majority) shareholder is the Bank of Russia. Lest there be any illusions, I will remind you that the Central Bank act stipulates that the Central Bank is not liable for the obligations of the state, and the state – for the obligations of the Central Bank. I am not even talking about the fact, that there are a bunch of non-residents among the minority shareholders of Sberbank. The above statement of Gref destroys the basic layman view about the structure of public administration in general and in Russia in particular. Over the past year the center of management of the Russian banks has clearly moved beyond the borders of our fatherland.
As a visual aid for this thesis we can take a longer look at Sberbank, which accounts for the lion’s share of deposits and loans of the Russian banking system. Last summer, when the active phase of the ATO began in Ukraine (the “anti-terrorist operation”) against the separatists of the South-East of the country, the Ministry of Finance of Ukraine has decided to provide financial assistance to the “defenders of the Fatherland.” A so-called Military loan for replenishment of the military budget of Ukraine was issued. The leading banks of the country were involved in the placement and purchase of the bonds, including the Ukrainian subsidiaries of Russian Sberbank and VTB. So Mr. Gref can be proud that he has contributed to the “fight against terrorism”, and shells bought with Sberbank money have claimed many lives on the territory of DPR and LPR.
Mr. Gref zealously watched and continues to watch that “irresponsible” citizens of Russia do not put their hands to support “the troublemakers” in Malorossia (the former name of Ukraine). As you know, our “irresponsible” compatriots have provided and continue to provide all possible humanitarian assistance to the civilian population of Novorossiya, which was besieged in a blockade, organized by the official Kiev. One of these forms of assistance — the transfer of funds to the accounts of Russian banks for the formation of various funds. Now, there were many occasions when Sberbank blocked such accounts on the instructions of the bank’s management.
However, it would be unfair to give all the credit for “fighting terrorism” in Ukraine to Sberbank and its head German Gref. VTB also provides feasible help to official Kiev in this “noble” cause. In the beginning of the current year the head of the second largest Russian bank, VTB, Andrey Kostin made an interesting statement. He decided to increase capitalization of the two Ukrainian “subsidiaries” for a total of up to 4 billion Ukrainian hryvnias (about $265 million). We are talking about “VTB Bank” (Kiev) and “BM BANK”. It is noteworthy that the statement was made at a time when the banking system of Ukraine was already going downhill, when loud calls for expropriation of Russian property on the territory of “the sovereign” [Ukraine] were heard in Ukrainian parliament. Ukrainian “expropriators” expressed special interest in the assets of Russian banks.
Even to a person far removed from the “intricacies” of banking, Kostin’s “recapitalization” comments must seem strange, even suspicious. Our Prime Minister Dmitry Medvedev , who is hard to suspect in the absences of liberal view of economy, had the same reaction. On January 20th, the Prime Minister said the following at a meeting with the head the Ministry of Energy, Alexander Novak and a head of Gazprom, Alexey Miller: “Our banking institutions continue to operate on the territory of Ukraine. In particular, our VTB Bank, the largest state-owned bank decided to increase capitalization of their subsidiaries in Ukraine. What is this if not a form of support of the Ukrainian financial system? And VTB made such decision, even though we have, frankly, different positions about what decisions to make and what decisions not to make in relation to Ukraine“.
How should we interpret the situation of “recapitalization” of VTB subsidiaries in Ukraine? In my opinion, as a clear manifestation of the fact that our government is not in a position to exercise “effective control” of the activities of Russian banks. Even in the event when this is called for by the complex international situation, threatening Russia’s security. The Prime Minister’s statement had no influence on the head of VTB. Moreover, in early June, Kostin has announced the sum of “recapitalization” – $600-800 million (2.5 to 3 times higher than originally stated). We can only guess how the “sovereign” [Ukraine] will use this money. Perhaps this is the money that early in the year our generous government handed out to the banks under the guise of the “anti-crisis program”. Let me remind you that out of two trillion, more then 1.5 trillion rubles went to the banks. Incidentally, VTB was one of the main “beneficiaries” of the anti-crisis program.
The events in Ukraine have become a litmus test, which revealed the true nature of the Russian banking system. One of its main features is that it is not controlled by Russian government. Who controls it then? Maybe the Central Bank of the Russian Federation? Perhaps. But the CBR is an institution not controlled by the executive, legislative or judicial authorities of the Russian Federation.
We are told that for the successful implementation of the monetary policy, the Bank of Russia needs an “independent” status. As in the physical world there is no absolute vacuum, there is no absolute independence in the social world. If we talk about the Bank of Russia, it is completely dependent on the Federal reserve system of the USA. No conspiracy here. The Bank of Russia operates as a “currency exchange”, its international reserves are formed with US dollars, which is a product of the “printing press” of the Fed. And our “national” ruble — is only a “green” dollar piece of paper, repainted in other colors.
Today everyone knows about the problem of dollarization of the Russian economy. Everyone understands that it should be challenged. At least in order to avoid further collapse of the ruble, such as the one that occurred in December 2014. Our officials sometimes talk about it, but in a whisper, backstage. Probably the bravest of them ended up in the organization called the National Security Council. On April 27, 2015, the issue about the threats of dollarization of the Russian economy and measures to restrict the circulation of foreign currency in the country was raised at the National Security Council. The Council has a high status and sufficient authority to enforce its decisions. Following the meeting of the Council, the Central Bank and the government proposed to expand the use of the Russian currency in international payments and to gradually reduce the use of foreign currency in Russia.
In turn, the officials of the Central Bank for many years repeated the same mantra: administrative measures to restrict the flow of foreign cash inside the country will not produce an effect, and therefore, their introduction is impractical. Why “will not produce” and why it is “impractical” remains a mystery. Officials of the Central Bank do not like to go into details and specifics of their argument. Journalists of one electronic publications attempted to get to the bottom of these details and subtleties to fully understand the reasoning of the Central Bank, exuding such a liberal attitude towards the circulation of foreign currency in the country. Moreover, the recommendations of the Security Council were addressed to the Central Bank.
And here is the answer of the Central Bank: “Administrative measures to restrict the use of foreign currency on the territory of Russian Federation were not discussed at the meeting of the Interdepartmental Commission. For its part, the Bank of Russia believes the adoption of such restrictive measures is inappropriate”. Such statements of the officials of the Central Bank remind me of the responses of the official representative of the U.S. Department, Jennifer Psaki. Moreover, the institution with a strange sign “Bank of Russia” reminds me of something else. It looks more like an American Embassy or a branch of the US Federal reserve system.
However, if just recently, the threads of actual management of our banking system stretching from abroad (the Federal Reserve and the U.S. Treasury) were not all visible, today the situation is different. Today only a blind person cannot see the reins of this overseas control. What do I mean? I mean the American law FATCA [Foreign Account Tax Compliance Act – KR]. Officially this law is aimed at combating those physical and legal entities who are obliged to pay taxes to the USA. But the mechanism for the implementation of FATCA provides that banks of all countries must provide information about suspicious customers (those who avoid paying taxes to US Treasury) to American tax service. Actually it is a tool of a vertical direct administrative control over foreign banks from Washington.
It is an example of a law of extraterritorial effect. Many countries made interstate agreements with the United States, which provide that not the banks themselves, but appropriate agencies will be accountable to Washington. In the case of Russia, it is assumed that each bank would report to Washington individually. I will not elaborate further on this interesting story. The reader understands that Russia is ultimately losing control over its banking system, it has been hijacked by the Fed and the US State Department. With that said the statement by the head of Sberbank, German Gref, made last week, looks quite natural.