Dear Readers,
For this installment of my free geopolitical newsletter I want to share
a piece I wrote in the midst of the US and EU economic sanctions war against
the Russian Federation in late 2015. In it I outline the history of how
Washington and the International Monetary Fund robbed the new post-Soviet
Russian Federation under Boris Yeltsin of the very core essentially of
economic sovereignty, namely the state’s control over money issue. They did
so through the aid of government insiders who had bet their personal futures
on siding with Western “shock therapy” economists against the interests of
their own country and its people.
In this piece I outline my proposal for generating state-initiated--but
Soviet-style controlled-- economic growth in urgently-needed basic
infrastructure. It draws on how federal Germany after World War II financed
its own reconstruction using state institutions of subsidized credit such as
the Kreditanstalt für Wiederaufbau (Credit Institute for Reconstruction)
during the 1950s to stimulate what became known by the 1960s as the German
Economic Miracle. It was no miracle, rather an appreciation of the role of
public banks and directed credit into select economic infrastructure. For
those of you interested in a deeper treatment of the history of the Russian
Federation during the tumult of the Yeltsin era of the 1990’s and the
incredible measures Washington took to destroy Russia as a functioning nation
state, you should watch for the appearance soon of my newest book, Manifest
Destiny: Democracy as Cognitive Dissonance.
For a better reading experience I converted the text to a pfd-file
which You can find in the attachment of this mail. It's 7 pages in A4
format.
I also encourage you to consider making a support contribution at my
website,www.williamengdahl.com, that I am able to continue
offering my content for free.
Thank you again for your interest,
F. William Engdahl
Frankfurt, Germany
Russia Can Solve All Economic Problems Itself
F. William Engdahl
November, 2015
Since Washington and the EU imposed hostile and unwarranted financial
and economic sanctions on Russia after the spring of 2014, President Putin
and the Russian government have made many sometimes brilliant moves to
respond to the de facto acts of financial warfare. However, they have avoided
dealing with fundamental deeper distortions and vulnerabilities in the
Russian economy and monetary order. Failure to do so in the future could
prove to be Russia’s Achilles Heel if not addressed. Fortunately, Russia can
do something about it even before an alternative currency to the US dollar is
at hand. It requires simply a bit of consequent rethinking about the
situation.
The key to Russia’s economy, to any economy for that matter, is the
question of who controls the issue and circulation of credit or money, and
whether they do it to serve, directly or indirectly, private special
interests or for the common national economic good.
Chaos swept the Union of Soviet Socialist Republics after the fall of
the Berlin Wall in November 1989. In July 1990, one of the first acts of
“democrat” and Western media hero, Boris Yeltsin, the newly elected President
of the Russian Soviet Socialist republic, one month after declaring
independence from the USSR, was to create the independent Central Bank of The
Russian Federation. That was one of the first acts, fully three years before
formal adoption of a new Russian constitution in 1993, where the independent
role of the Central Bank of Russia would be outlined in Article 75.
At the time US hedge fund speculator, George Soros, had brought Jeffrey
Sachs and Sweden’s Anders Aaslund to Russia to “guide” Yeltsin “shock
therapy” advisers such as Yegor Gaidar and Anatoly Chubais. Together, along
with pressure from the IMF, they turned the country into an impossible chaos
and economic collapse for most of the 1990’s. Pensions were wiped out as the
Russian National Bank under the leadership of Viktor Gerashchenko, printed
endless supplies of worthless rubles, creating a mammoth hyperinflation of
prices. A handful of favored Russian oligarchs close to the Yeltsin family,
such as Mikhail Khodorkovsky or Boris Berezovsky, became staggeringly wealthy
oligarchs while the vast majority barely survived. This was the social petri
dish in which the Article 75 mandating the new Central Bank of the Russian
Federation was formally adopted.
The Russian Central Bank, which is today a member of the
western-controlled Bank for International Settlements in Basle, has the
explicit constitutional mandate to be an independent entity, with primary
responsibility of protecting the stability of the national currency, the
ruble. It also holds exclusive right to issue ruble banknotes and
coins. That’s de facto life and death power over Russia’s economy.
With Article 75 the Russian Federation de facto gave away sovereignty
over her most essential power–the power to issue money and create credit.
Amid the horror of hyperinflation which few Russian citizens understood was a
deliberate strategy of Gerashchenko and his Western advisers, a strict,
politically “independent” US-style central bank seemed an urgency. It was in
fact a trap.
Today that central bank trap has come home to haunt President Putin,
his government and the Russian people as a US-imposed financial warfare and
targeted sanctions forced the Central Bank to raise key interest rates
December 2014 threefold to 17% to try to defend a ruble in free-fall. Today,
despite a significant stabilization of the ruble, central bank rates remain a
severe 11%.
The Russian Central Bank, no matter how patriotic the person running
it, is a monetarist institution not an arm of sovereign state policy. To keep
the Ruble “stable” means stable against the US dollar or the Euro. That means
the independent Russian Central Bank is de facto hostage to the US dollar,
hardly an ideal circumstance in the current state of de facto war by other
means underway from NATO, the US Treasury Department, the CIA, Pentagon and
US neoconservative warhawk circles.
During the June 2015 St. Petersburg International Economic Forum I was
told by a quite senior Russian government minister that there was an intense
internal debate inside the government and around Putin’s advisers, about
re-establishing a public national bank, as opposed to the independent
BIS-modelled central bank imposed by the West on Russia in 1990.
While that very positive and necessary step of bringing the power over
its money and credit under state control has yet to occur, Russia can do
something in the meantime. It’s elegant in its simplicity and requires no
direct alternative to the dollar system in order to gain the capital needed
for the still-immense task of rebuilding Russia’s economic infrastructure
from Vladivostok to Rostov on Don, from Murmansk to Omsk, from Yekaterinburg
to Moscow and beyond. The money capital would originate from within Russia,
from the creation of state-backed “Russian National Development Fund” bonds
and the personal savings of Russia’s citizens. The name Russian National
Development Fund is merely a working name, and completely secondary. The
content is essential. How would this work?
The Duma would approve the creation of a 100% state-owned special fund
to be housed within the Russian Federal Treasury. It must be clear that this
Fund within Treasury has a unique, special character dedicated to public
expenditure on specific nationally important big infrastructure projects and
not to be diverted to numerous other claims on the Government budget. If a
separate authority within the Treasury, with a different Board of Directors
other than the existing government cabinet ministers is necessary to insure
the funds are dedicated, that can also be done. The aim is to insure
dedicated funds go to the designated infrastructure demands decided by the
national planning process, but with minimal new bureaucratic layers
This Russian National Development Fund–and this is essential–would
issue national infrastructure construction bonds directly from the
government, through the Russian Federal Treasury and not through the
independent Central Bank of Russia or the banks. The infrastructure bonds
would be sold not to private interest-charging, fractional reserve lending
banks but directly to the people, if you will, “Citizens’ Bonds.”
The special Russian National Development Fund, housed within the
Treasury, could issue long-term 20 and 30-year duration bonds that would pay
an annual interest of an amount to make them attract the savings of normal
Russian citizens, somewhere on the level say of 15% annually assuming
inflation stabilizes at a level below that.
It is important that the new bonds be at least for 20 years so as to
insure continuity of the work on large projects. The very creation of the
fund will have a significant impact on reducing the current inflation rate as
productive investment in economic infrastructure is counter-inflationary as
it would increase the circulation of industrial goods and create productive
workplaces in direct proportion to funds raised for and disbursed by the
infrastructure authority. The annual interest on the bonds as well as the
ultimate principal would also be tax free, another incentive to invest.
The principal would be paid back to the citizen bondholder at maturity.
The initial purchaser of the bond need not hold it themselves for the
full 20 years to maturity. Some form of secondary market such as repurchase by
the post office under set conditions and subsequent resale to a new investor
could be established.
Moreover, as noted, the bonds would not be sold through private banks
but through the national Russian postal system, eliminating the costly and
risky private secondary bond trading of the private banks. For this to work,
control of the post must remain in state hands. The bonds would not be a
digital computer entry but actual paper bonds issued on special safety paper
that cannot be forged easily.
If it is decided to create a separate state infrastructure development
fund within, but separate from the Treasury for the above-stated reasons, a
Board of Directors composed of citizens of the highest respect and integrity
would be useful to boost the confidence of the people in the new institution.
Now as to the nuts and bolts: Let’s say an ordinary Russian worker or
salaried employee goes to his local government post office where he can buy
the special development bonds for, say, a face value of 20,000 rubles, about
$300 today and affordable by most Russians, at an interest rate of 15%
annually. He would get 3,000 rubles in tax free income annually for twenty
years and at the end of maturity, the added full bond amount of 20,000 rubles
in addition to the 60,000 rubles for a total of 80,000 rubles, all tax free.
The progress of various projects funded could be regularly shown as
“progress reports” to the nation in form of national TV documentaries or
videos on the website of the Fund. That would strengthen identification of
the investing public seeing what their savings are creating.
At a time when stock markets around the world are melting away to the
tune of trillions of dollars in asset value and foreign currencies and
international commodity prices fluctuate wildly, the Russian state-guaranteed
infrastructure bonds would be an island of stability from those foreign
storms, and the engine of real, vital economic growth for the nation. The
government would get the use of the invested money to build the national
infrastructure which in turn will significantly increase ordinary tax
revenues to more than service the interest on the bonded debt. It avoids
having to impose onerous new taxes to finance it.
Over that twenty years, the government issues private bids for specific
priority national infrastructure projects such as modernization of the
electric grid, construction of a national network of high-speed rail
transport along the general model of and fully integrated with China’s
internal high-speed rail network. Those projects would bring well-paid
skilled jobs for hundreds of thousands of Russian people. Those new jobs in
turn would pay normal income tax on the earnings from building the new
Russia. That in turn allows the Russian government to finance its needs,
irrespective of western financial sanctions and the cutoff from western
credit.
The little-known secret
There is a secret about economic infrastructure investment. Unlike
various literal “windmill-building” government subsidized projects in today’s
EU or USA, construction of necessary economic infrastructure such as
high-speed rails–projects that make the arteries of the national and
international economy flow faster and more efficiently–such infrastructure
projects bring manifold economic gains to the overall economy. This is the
long-forgotten “secret” of infrastructure investment discovered in America
during the Great Depression when the government issued bonds to build the
huge hydroelectric complex in the Government’s Tennessee Valley Authority and
other massive infrastructure projects.
Various USA studies from the 1960’s, back when America still invested
in its national infrastructure, found that spending on such vital economic
infrastructure repays the state in new tax revenues approximately 11 dollars,
or in this case rubles, for every dollar or ruble initially invested. That is
the secret of well-conceived infrastructure spending.
Count Sergei Witte, Russia’s great government railways minister who
went on to become the finance minister and then Prime Minister under Czar
Nicholas II, understood the vital role of national transportation
infrastructure in building and modernizing the Russian nation. He was the
father of the then-massive Trans-Siberian Railway project, a project that
made England very uneasy as it challenged British world control over the
seas.
The British, and later the United States with her, fought two world
wars in the last century to prevent further development of similar
trans-Eurasian rail links across what Mackinder called the Eurasian
heartland. Now, China and Russia are joining forces to do just that.
The creation of the Russian National Development Authority allows
Russia to maximize its part of that revolution in the world economy, world
geopolitical relations and cultural relations using its internal resources
not foreign borrowed money.
By having the citizens buy the bonds directly, the Russian government
avoids having to turn to foreign capital markets, even friendly ones like
China, for raising capital. It avoids the onus of foreign debt.
Depending on how the buying of national infrastructure bonds is
presented to the population, in the present crisis they could readily become
a symbol of national patriotism and individual commitment to Russia’s
prosperous future. In a future article we will discuss the essential
advantage of creating a government-owned National Bank rather than an
independent central bank.
Russia has everything any nation could need in abundance to build a new
world of stability and prosperity for its people and become a magnet for
other nations to imitate as remote as it may sound today. She has the
character, the moral determination as shown over the past months amid brutal
sanctions and attacks. She has perhaps the best educated scientific manpower
on the planet and a skilled labor force. The resources all exist in
super-abundance. It’s simply a matter of getting the flow of goods and people
working in the right direction.
With the nation united and good as it has not been in memory, amid the
hostile Western sanctions and attacks, and with a President enjoying the
confidence of more than 85% of his people, the time to introduce such an
infrastructure fund is ideal. It offers every Russian the possibility to
support the building of his nation while earning a sum for his later years as
well.
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