Today, everyone is talking about yesterday's speech by Vladimir Putin regarding the situation with the coronavirus epidemic and the gradual easing of restrictive measures. Frankly, his address was not so interesting. Indeed, there were phrases regarding the abolition of the self-isolation regime. Apart from that, the president talked about financial support for families with minor children and unemployed, as well as expansion of measures to support the economy. These support measures mainly include the expansion of lending to those companies that will retain jobs. Anyway, small and medium-sized businesses have not seen any assistance yet. Moreover, new loans are likely to allow them to stay aloft for a couple of months. Overall, all these new and additional steps are only aimed at the expansion of those measures that have already been introduced. Thus, the speech did not contain any relatively new information. Apart from that, nothing was mentioned as to when exactly the quarantine restrictions will be lifted. In the US and many other countries lockdown has already led to mass unemployment. Similar events may unfold in Russia as well. The situation is extraordinary and requires drastic changes in the economy. However, the Russian government only grants a delay in paying taxes instead of completely abolishing them for the self-isolation period. Instead of providing direct financial support due to force majeure circumstances, they suggest new loans, which must be repaid anyway. However, the situation is not any better in other countries. People are losing their jobs, while small and medium-sized businesses have never seen all those promised billions and trillions of dollars and euro. Thus, there is nothing to be surprised at.
Overall, Vladimir Putin's speech did not bring any clarity to the whole situation. Meanwhile, Friday's press conference of the head of the Bank of Russia was really an extremely important event. Nabiullina had not managed to complete her speech yet and the press conference became the headline of all economic news releases. Over the course of several days, everyone wrote that the Bank of Russia could reduce the key rate as much as 4.5%. They stopped talking about it only after Vladimir Putin addressed the nation. It seems like journalists are writing only about things they want to say and not about what is really going on. Elvira Nabiullina only said that the regulator considered the possibility of reducing the key interest rate by fifty, even by one hundred, basis points during the previous meeting of the Board of the Bank of Russia. She said that the decision on the scale of the reduction of the key rate would be made based on the ongoing situation.
Since the Federal Reserve System had drastically reduced the interest rate at the course of two emergency meetings, it became clear that other central banks would do something similar.
All these days I have been waiting for at least someone to finally talk about what Nabiullina actually spoke of. However, everyone was only paying attention to the interest rate. The head of the Bank of Russia made extremely important statements. One of them, in fact, was about a fundamental restructuring of the entire financial system. Firstly, Elvira Nabiullina focused on the fact that the level of public debt was incredibly low giving the Bank of Russia room to maneuver. It means that the country, if necessary, can freely increase the size of borrowings without any fear of default. The words of the head of the central bank are nothing more than a message that the Bank of Russia may well be the buyer of these same government debts. That is nothing more than the direct financing of the budget by the central bank. When I heard this, I immediately remembered the inflation chart for 1992 and 1993. Back then, the central bank did just the same thing. At that time inflation reached several thousand percent a year. People who remember those times know very well how fast prices rose in stores. I doubt that there are people who wish to go through this again. In this case, I may be exaggerating. However, it is better to play it safe. The most important announcement was the launch of annual repo auctions with a floating rate. The fact is that Russia has a system of fixed interest rates. Changes in the key rate of the Bank of Russia do not affect existing credit or deposit agreements. The system of floating interest rates implies that the rates on loans and deposits are not fixed, but are calculated according to the formula, where the main variable is the refinancing rate. And if you take a loan at 10% per annum, and the central bank then changes the refinancing rate, your loan rate will be immediately recalculated, and from the date the refinancing rate changes, you will pay other interest. Thus, if the Bank of Russia begins to issue loans to banks under the system of floating interest rates, then this is the beginning of the transition from a system of fixed interest rates to floating. It is quite obvious that businesses right now need to hire specialists who can prepare all the necessary recommendations and instructions for financial accounting and planning. However, everyone is only talking about the reduction of the key rate. In two or three years, when they begin to introduce a system of floating rates, the business will be completely unprepared for this. We can only hope that by this time it finally begins to recover from the current upheavals. A new wave of bankruptcies and layoffs will occur. Moreover, the Bank of Russia has already warned that it is moving in this direction. But the business did not listen to what the head of the Bank of Russia had said. Moreover, it does not quite understand what conclusions to draw from all of this. Meanwhile, journalists and experts, whose functions include this very explanatory work, are not aware of what they are doing. Everyone will again blame the government.
Just a couple of days ago, I saw a video with a rather famous and popular mathematician on a good science-fiction Internet channel. Thus, with all due respect to him as a mathematician, this time he talked about the evolution of economic theory. It remains only to ask an economist to talk about the evolution of whales. Everyone must do their job. Alas, only well-known people are asked to speak on the important economic issues. It doesn't matter whether they understand what they are talking about. So it is not surprising that our ideas about the economy are more reminiscent of ancient Greek myths than any rational and logical interpretation of what is happening.
Nevertheless, all these really important statements of Elvira Nabiullina will have some effect only in the long term. At the moment, no major changes are expected. The situation with the oil market is still relatively calm. Therefore, it is not clear yet where the ruble is going. Meanwhile, the dollar will be trading at 73.50 rubles. If the external background remains calm and neutral, the dollar will sluggishly decline towards 72.25 rubles. But this is rather a medium-term trend.
