Ruble to become a reserve currency

 

Author: VK 

 

Last autumn, Prime Minister Dmitry Medvedev announced that Russia is beginning to promote the project by giving the ruble a reserve currency status, and not in isolation, but together with our partners in the Common Economic Space - Kazakhstan and Belarus. "We are thinking about solving together these currency issues, as well as developing the financial center in Moscow," Prime Minister said. Experts rate this initiative with skepticism, unlike officials who look at them with optimism.

According to Alexey Moiseyev, Deputy Finance Minister, “the announcement by the Bank of Russia on the adoption of the floating exchange rate starting from 2015, which the Bank of Russia made when they published their guidelines for the Common State Foreign Preventive Policy, is a great achievement. I
think that is a very big step forward, not only to stabilize our macroeconomic stability. Here, in this case, I believe that a floating exchange rate, together with the recently-adopted budget rule may well be stone pillars or the foundation of macroeconomic stability, in the face of a persistent and clearly overall not-disappearing significant dependence of Russia on volatile prices on energy resources... What is in fact a reserve currency? It is a currency in which, on the one hand, one keeps one's savings, and, on the other hand, a currency in which the issuers want to place their securities or bonds. In order for this to work, in both cases there are some prerequisites. There is the need for condition number one - this is the predictability of monetary policy. In fact, we are now, thanks to the central bank, on the way to achieving it.

 

The second prerequisite is certainly no currency restrictions. We have no currency restrictions. As you know, foreign exchange restrictions were almost completely abolished in 2007. Actually, Russia, and it was discussed today at the Plenary session, and was discussed today by the chairman of the government, despite the fact that it was widely expected that Russia would again impose currency restrictions in 2009, Russia did not do so. I think this is very important, and it showed that even in a situation of enormous capital outflow, Russia did not succumb to the temptation to use such non-market methods and introduce currency regulations. In this sense we are, in fact, ahead of our fellow members of the BRICS.

 

Frankly, I believe, for example, that the first two factors, the floating exchange rate and exchange controls, up till now and as long as they exist they are keeping the yuan from becoming a major reserve currency.

 

To become a reserve currency, a currency certainly needs a developed market of securities. There is some irony in the fact that only countries with well-developed public debt markets can become issuers of reserve currency. Ironically, the fact that America has such a large amount of public debt denominated in U.S. dollars, is one of the main reasons why the dollar is such an indispensable reserve currency nowadays. That is, to physically invest the reserves, even in federal banks, I'm not talking about the potential of the private sector, from dollars, from the U.S. Treasury into any other currency is simply impossible because of the scale. That is, such a great amount of liquid and state securities exists nowhere else. This is ironic. Naturally, this does not mean that I am urging the announcement of a 15% deficit every year and print federal loan bonds for that amount each year, which would give us a reserve currency. Of course it's not like that. But this suggests that there must be a developed local stock market. In this regard, measures aimed at stimulating the Russian securities market, are very important. They are also very important for satisfying one more condition: to make people willing to issue in this currency. 

 

 

As you know, we have had a precedent issue of ruble securities in a foreign state. I am talking about Belarus. You have probably already heard, it was reported that Serbia is considering placing its government securities in rubles. This means that some things are happening. Basically, I think that, of course, especially after the crisis of 2008, a large number of financial markets or the financial markets of a number of countries that are geographically close to Russia, became so to say marginalized. We are talking about trading volumes of tens of millions of dollars per day. In most countries of the former Soviet Union and in some other counties, which are located close to us. These are not volumes that can be accepted by any issuer willing to place his securities. Therefore, in this situation Russia certainly has a natural advantage, because Russia is a familiar  market, conceptually, and culturally. In this regard, one can expect that if we manage to build an adequate market infrastructure, certainly the issuers of these countries will actively issue their securities on the Russian platform. One of the examples, in fact an exemplary case, is certainly for us the Warsaw Stock Exchange. As you know, Poland was not naturally a center of any kind when the Soviet bloc collapsed, when the Council for Economic Assistance ceased to exist. Therefore, to say that the British are a financial center, because they always had been... It is certainly true, but we have at least one example of a country that, having conducted successful reforms, has become a regional financial center. As you know many countries, particularly Ukraine, use Warsaw as their major platform for placing securities. I am talking about the private sector of course. This suggests that there is no reason why we cannot compete with Warsaw in this sense. It is clear that in order for the ruble to become a reserve currency at a regional level, two macroeconomic "boxes" have already been checked. It remains to construct efficient financial markets. I think that when we develop them, and I have no doubts that we will, then we will certainly have a real chance in the regional context, unless, of course, the ruble does not become included in the euro-dollar-euro etc. system. Then, certainly, we will have a real opportunity to build a very strong regional reserve currency in the regional context”.

 

“Undoubtedly, if we want the ruble to become a reserve currency, above all we need a strong economy, and secondly, the currency should be stable”, Alexander Voloshin, head of the Working Group on the International Financial Center, says. “In order to be stable, the currency certainly should not depend on the price of oil and gas to such an extent, like today. One aspect of turning the ruble into a reserve currency is serious economic diversification. One of the trends and tools of this diversification is the establishment of the International Financial Center in Moscow. Of course, these two problems are related to each other. Both tasks, by the way, are largely tied to the quality of the investment climate, with which we have a lot to work with.

 

 

Speaking about the project of the International Financial Center, Voloshin said that it consists of three groups of tasks: “The first group of problems is the formation of an adequate financial infrastructure and the development and implementation of sound financial management. This is the first large group of questions. We are moving in this direction quite rapidly. As you all know, we have a stronger market, strengthened regulation, we are establishing a central depository, and  developing our legislation. We are moving, frankly, a bit slower than we would like, but we are still working quite hard, and we have had some success. I think the challenge of building the financial infrastructure and financial regulation and bringing them to a good world level for just a few years is absolutely real. This task is not for the long term, it is a task for the next few years, and it is quite real.

 

 

The second major part of the work is, in fact, the city of Moscow. The city must be acceptable for a normal life, then it would be acceptable for the International Financial Center. In addition, Moscow, as well as the country as a whole, should be much more open and much more international. We have to understand that success will come to us only if we learn to be open and international. Before the New Year I went to the Polytechnical Museum for the first time after my first tour there. I got there, because it is now closed for renovation and will never be the same - let's hope that it will be better. There I spent a few hours with my children and had the opportunity to see the achievements of Russia over the centuries - including the XVIII, XIX, XX centuries. I was very impressed - first, these accomplishments were numerous, including the first electric vehicle that was created in Russia a hundred years ago. But I was surprised that it was an open and international country. Every second or third name in the list of our achievements is a foreign name. The best engineers, doctors, professors were coming to us. In this sense, Russia then was better than America today. It was an absolutely open country that attracted to it and tried to incorporate the best. And in this way it achieved successes, which, unfortunately, were interrupted by the well-known historical events of 1917, but still the country was on the rise, and the path to that success was through openness. So, back to the answer to the question and to our present subject, the International Financial Center is international because it is present in an open country and an open city. Frankfurt, which 20 years ago was quite a closed German city, is characterized by the fact that a third of the city's population does not have a German passport. One third of the resident population of the city are foreigners. If we want to see the International Financial Center in Moscow, we have to train, learn, and become much more open. It is impossible to remain closed and try to create something. This is a serious psychological challenge; this is the second part of our problem.

 

 

And the third is common issues of the investment climate. This is probably the hardest part of our work in the long term. Does this mean that the investment climate will be, God willing, improving gradually, but it will be perfect, obviously, not very soon, does this mean that up to this time an international financial center cannot be created in Moscow, cannot be formed? Of course it can. This requires a critical mass of the positive. If we remember the history of other countries, when in New York an international financial center was formed, the streets were full of gangsters shooting at each other with machine guns, and the governors and the police were totally corrupt, in general, there were enough problems. But on the other side of the balance there was the positive. It was an open country, a thriving economy, a high degree of economic freedom, and a financial center was formed in New York, in spite of the gangsters, corruption, etc. I do not say that we need to keep the gangsters and corruption. I mean, we need to create a positive which will outweigh all of our difficulties. This is a real problem, we are moving on it.

 

 

Now in the government a new road map is in the final stage for the coming period. It was not produced bureaucratically; we produced it together with market players. It is based primarily on the wishes of the market players, i. e. on what they need here in Moscow to develop the financial industry and to shape the International Financial Center. Well, that task is supported politically. It is supported by both the president and the prime minister. There have recently been talk that this idea is not possible, and in general Dmitry Anatolyevich Medvedev expressed it in vain. I want to correct the author of this statement, whom, of course, I respect: the idea was originally expressed by Vladimir Vladimirovich Putin. Vladimir Vladimirovich Putin, when Prime Minister, approved the first plan to establish an international financial center in Moscow, and now the idea is supported by both the president and the prime minister – in such projects, as you know, political will means a lot. So I have every confidence in our success, I am absolutely well aware of the depth of the problems and of the list of our challenges, it's pretty difficult. But I am absolutely sure that it is real, and we are on the right path”.