January 02, 2008 (the date of publication in Russian)

BEFORE THE FLAMES OF CRISIS BREAK OUT

Having gained political stability, Russia encounters the challenge of a systemic economic collapse

The situation in Russia is changing beneath our eyes. The political prospect of spring 2008 is clear to anyone: it is quite stable and predictable. However, the acquired stability does not guarantee from rising economic problems. A real menace for Russia emerges from economy, not from a mythological "orange revolution". Agreeing to accept the post of Prime Minister, Vladimir Putin took up an extremely heavy burden.

The latest developments in Russian economy, including the crisis of bank liquidity, the hike of prices for consumer goods and the outburst of inflation, are intimately intertwined. In order to prevent a dire outcome, it is necessary to undertake resolute anti-crisis measures. PR-makers and spin doctors are powerless before the actual challenge.

 

Participants of the discussion:

Andrey Kobyakov, Ph.D. (Econ.), Assistant Professor, Moscow State University; co-editor of The Russian Doctrine, publisher of RPMonitor analytical online journal.

Leonid Paidiyev, Ph.D. (Econ.), Advisor, German-Russian Philosophic Society.

Maxim Kalashnikov, futurologist writer.

 

WHEN "THE LENDER OF LAST RESORT" RESIDES ABROAD

Maxim Kalashnikov: The stability of Russian economy is deteriorating since last autumn with a suspiciously high speed. Increasing problems of bank liquidity, restricted conditions of mortgage, soaring prices for consumer goods, zooming inflation – is all that a temporary coincidence, or a harbinger of a more serious crisis?

Andrey Kobyakov: The conclusion is obvious. The keystone of any modern economy is a strong banking system. During all the years of reforms in Russia, it has failed to emerge. Russian banks are small. The largest of them are not even represented in the list of the twenty largest world's banks. Meanwhile, Chinese banks have already performed a breakthrough into the global financial elite. Four of them are among the 20 world champions by market capitalization, two – by the amount of tier 1 capital, and one – by total assets. The Russian Federation is a financial dwarf. The Russian Government was reluctant to establish strong financial-industrial groups and multi-profile industrial conglomerates led by powerful banks, as the Japanese did in the fifties and sixties, or the Koreans a decade later. Take Fortune Magazine's list of top 100 companies. Here, we find five or six formally independent names containing the name of Mitsubishi: Mitsubishi Motors, Mitsubishi Construction, Mitsubishi Shipbuilding etc. The controlling or blocking ownership in all of them is held by the parent bank, Mitsubishi UFJ Financial Group, former Bank of Tokyo Mitsubishi, which is present in the same list as well as in the top 10 list of banks. All the mentioned companies are controlled by a single bank, at the same time being its shareholders. They comprise a strong and self-contained system. It is noteworthy that such kinds of conglomerates were created on intention by a directing and organizing will of the state. Similar "state capitalism" has provided a breakthrough in the development of the whole economy of Japan and South Korea.

What is the financial system of Japan? It is a number of fifteen mega-banks, each of them controlling a cluster of powerful scientific-industrial corporations. The lower layer is comprised of three hundred regional and municipal banks servicing governmental and administrative programs and the system of inter-budget settlements. Next, a system of post banks for citizens with interest-free deposits and a 100 per cent provisioning that guarantees perfect security of individual savings. This powerful financial system, created deliberately, on a state policy design, is successfully functioning. This system of state capitalism enabled Japan to endure the crisis of early 1990s, and Korea – the crisis of late 1997. Just imagine: the Japanese system did not fall apart even being emburdened with over 1 trillion dollars of bad debts. Tell this figure to a Russian banker, and he will go and hang himself. The whole banking system of the Russian Federation is unable to tolerate a ten times smaller amount of unpaid loans.

In 1990s, Russian banks were not engaged with banking: instead, they serviced particular companies in the role of pocket banks. Thousands of minor banks serviced particular segments of particular operations. They can't be regarded as crediting and depositing institutions. They can't allow themselves issuing large-scale long-term credit: this is available exceptionally for the large and quasi-state-owned Sberbank. While Japanese and Korean banks are able to mobilize loans of dozens billions of dollars, while the national banks of South America are able to provide long-term loans of billions of conventional units with a privileged interest, there is nothing of that kind in Russia. Only quite recently, with a huge delay, the Russian Government committed itself to establish the Russian Development Bank.

Therefore, the crisis of bank liquidity in Russia was inevitable. Where did Russian banks receive "long-term" loans in the recent years? Where did the mortgage system originate from? Quite simple: the money was borrowed from the foreign markets. On the very day of the subprime mortgage crisis in the United States and the ensuing inter-bank crisis, this source dried out (with the zoom of lending rates at the global credit market), and a banking crisis started in Russia as well. There was just nothing to borrow from! That was a matter-of-course retribution for the failure to establish an alternative national source of credit.

M.K.: It should be added that without this spine of economy, a strong banking system, Russia failed to create a competitive sector of agroindustrial production, falling into a trap of dependence from imported goods – and as soon as those rose in price, the national economy was shaken with inflation, also facing a visible prospect of a financial crash.

Leonid Paidiyev: Without a developed and efficient banking system, no country can afford a viable agroindustry, providing daily bread for citizens. Any country, being determined to rise, created a system of non-inflationary saturation of the economy. The best example is Germany. Creating the Second Reich, Chancellor Otto von Bismarck built up a system of state finances, crowned with the Reichsbank, subordinated to the Government. After the defeat of Germany in World War I, the Reichsbank was made independent on the demand of the winning powers. In this way, the international financial circles tried to guarantee that Germany remain a weak country. Ascending to power, Adolf Hitler immediately subordinated the Reichsbank to the government. In 1945, it again became independent – and only today, with great difficulty, the German state is trying to subordinate it again.

(In the USSR, the State Bank was also subordinated to the Council of Ministers. After the defeat in the Third (Cold) War, the Russian Federation – on the demand of the winning West – introduced a Central Bank, independent from the government until today – Editor).

The duty of the Central Bank is to issue credits for production. If it neglects this duty, the whole country, including its private bankers, industrialists and agrarians, is forced to crawl to foreign creditors and beg for loans. In a country with such a deficiency of financial sovereignty, a crisis in any sphere, be it policy, economy, social services, or food supply- is an issue of a good or evil will of foreign lenders.

The Bank of Russia has not created any source of Russia's economic sovereignty. Russian bankers were forced to seek liquidity in offices of foreign banks. We are just reaping the fruit of this neglect.

A.K.: This issue of economic sovereignty is quite practical. There is a significant definition in economic science: the lender of last resort. It is the lender of last resort who is to be able to generate credit resources. The country's possession or lack of such a lender determines presence or absence of financial sovereignty. Where is Russia's lender of last resort? In case he resides in the Bank of Russia, that is one story. In case he is outside Russia, that is a different story. So, where does he reside?

L.P.: It is obviously in the Federal Reserve of the United States.

M.K.: It is true that the so-called gold currency reserve of Russia, including the Stabilization Fund, is pumped out to the Federal Reserve. Meanwhile, the country could make use of the petrodollar super-profits, establishing a system of powerful national development banks, acquiring real sovereignty and providing the real economy with a resource of long-term credit. But we are told all the time that monetary investments in the economy would turn a huge inflation – which in any case, the consumer market would pay for. At least, that is the leitmotif of our Vice Premier and leading economic decision-maker, Mr. Alexey Kudrin.

L.P.: We need not only a source of liquidity but efficient channels of pouring money into the economy. Certainly, if you just start printing rubles you'll get nothing but inflation. However, there are a lot of methods of non-inflationary saturation of economy used in international practice, as your obeisant servant has reported a lot. For instance, the scheme of transfer notes, preventing cash from penetrating into the consumer market unless this money achieves a commodity hedging. For instance, the US mechanism of mortgage that has never been used in Russia. There is a whole array of technologies which have never been, and is not used in Russia. The result is absurd: the economy is swollen with oil and gas export incomes, but one can't borrow for a low interest in any domestic bank: this is possible rather in a Czech than in a Russian bank.

What is food industry? It is a huge consumer of credit resources just due to the seasonal type of production. Besides, significant amounts of food are to be purchased by the state and stored as a guarantee of food security. In case you have got a reserve, you are able to survive a poor harvest, or to undertake a commodity intervention in the markets. In order to create food reserves, you also require long-term credit.

However, if your sources of long-term credit reside outside the country, the cutout switch, triggering the crisis, resides also there. Possessing neither a source of liquidity, nor a system of non-inflationary distribution, nor a mechanism of overcoming a possible banking crisis, the country leaves itself alone with the foreign "lender of last resort" that can push it towards a crisis at any moment he likes.

You remember what happened on the eve of the financial crash of 1998? Financial settlements were frozen; commercial banks exhausted; the Central Bank printed money and deliberately distributed them among commercial banks. You remember what the commercial banks did? They immediately exchanged the emitted rubles for foreign currency and exported it abroad. You remember what happened next in the economy? Prices zoomed to the heavens; the state lacked currency for critically essential imports; the settlements were paralyzed.

M.K.: At that time, we seriously expected a drain of food supply for major cities, of reluctance of the regions to transfer revenues to the federal authorities; we expected social explosions and outbursts of separatism. It was unclear whether the Russian Federation would survive or fall apart. Is a similar menace realistic?

 

THE MENACE OF A "NEW 1998" CRASH

L.P.: In fact, we have no guarantees from a "new 1998" situation at all. Russia's banking system may go bankrupt just if foreign lender refuses to provide new credit. The same may ensue from a global crisis of liquidity. However, there is one more possible reason. According to the official statistics of the Bank of Russia, Russian banks have borrowed an amount of money reaching $130 billion. This is mostly "short money" – which means that in 2008, they have to return $48 billion. Add the aggregate debt of major Russian corporations, reaching $300 billion. Do you just imagine what is going to happen in case we don't receive new loans?

Certainly, a portion of this debt is of Russian origin. Its owners, escaping from domestic tax pressure, have exported their incomes from Russia and now style them as foreign loans. However, these pseudo-Western loans comprise a minor part of the aggregate liabilities. Secondly, any money that arrives from outside is foreign money, as it is managed from a foreign "benchboard": its Russian owners can be easily forced to behave in accordance with the needs of the Western financial elite.

M.K.: It is true that the signs of a new 1998 are plenty. Take the frantic effort to pump the budget money, reserved for implementation of priority national projects, into commercial banks. In this way, the Government is supposed to overcome the crisis of liquidity. However, will those resources be sufficient, and can we be sure that they are not going to escape from the country in the same way as in 1998?

I have an impression that the Government is going to repeatedly bring sacrifice to the idol of liberal fundamentalism. Could anybody explain why borrowing from Gazprom in the West complies with the "principles of market", while borrowing at home for the same purposes does not? Why is it better to return billions of dollars, with a massive interest, to the West than to pay back to the Russian Federation? Why, generally, falling into dangerous dependence from outside forces is regarded as market policy?

A.K.: This logic is really strange. Actually, we don't create our own sources of credit, our own "lender of last resort", our own financial system – thus forcing Russian industrialists to beg for foreign loans. Not surprisingly, Russian cities are dependent from 60 to 80 per cent from imported goods, especially food products.

For a certain time after the 1998 devaluation, the dependence from imports decreased; it became profitable to produce domestic goods, and revival of domestic industry acquired certain prospects. Primakov's government also froze the tariffs of natural monopolies, thus enabling the industry to grow by 17.5 per cent for one year. Today, this advantage is exhausted; all kinds of imports increase; it is again more convenient to import than to produce. The country is again in the trap of imports of food and consumer goods. We would have long encountered a new crisis if the oil and gas prices did not grow since 2000.

Russia had an opportunity to make use of use that post-devaluation pause which provided competitiveness, though being not quality-based but price-based. By the way, the society was then prepared for some force-majeure policy change, like a coercive redistribution of oil export incomes, as well as construction of new competitive enterprises. After all, it was just possible to force the fuel exporting corporations to diversify their assets and invest in other industries.

Instead, the economy of Russia has been developing during the last decade in the same fuel-dependent, outdated mode. The degradation of the economy's branch structure has only redoubled. Where are the bulk of investments pouring today? Just into the same extraction and first-stage recycling.

M.K.: I can illustrate this trend with a vivid example. The Government is planning to invest not more than $2 billion in the domestic electronic industry in the period between 2008 and 2011, and $2.5 billion during the next four years. Meanwhile, the Olympic Games in Sochi are going to absorb almost $15 billion.

Meanwhile, China (in 2006-2010) invests $37 billion in its electronic industry. Some foreign private corporations invest more in electronic science and technologies than the Russian state: for instance, Intel and Samsung annually invest $5.5 billion in this sphere.

The Russian Government's attitude to the domestic electronic science is a national disgrace.

A.K.: This means a regressive structural obliquity in domestic economy. In this way, Russia's dependence from global fuel prices could be only increased. I don't know a single similar example in the world when a government, possessing such a unique opportunity for a structural policy as that Russia had after the 1998 crisis, would fail to use it.

Meanwhile, investment possibilities are restricted. Firstly, Russian owners lack legitimacy of their property. Realizing the prospect of losing it at any moment, they refrain from long-term investments. Instead, they wring out a maximum short-term profit, with no regard of the future. The quality of the owners is another problem that requires a special discussion.

In any case, the regressive type of today's economy is draught with collapses by definition. This economy, easily destabilized by pressure from outside, is essentially instable. It is incredibly stupid to hope that it may be changed only by market methods of reorganization.

 

THE MOMENT OF TRUTH

M.K.: Generally, the West could easily respond to Moscow's attempts to use gas price arguments in political affairs, just threatening Russia with cutout of food supply. Our Government would have to admit that any ambitions of superpower are worthless while Russia depends on food supplies – as well as on Western loans.

L.P.: It is noteworthy that the global food market is controlled by a narrow number of players. These levers of control are sufficient to provide political pressure, and even to overthrow an inconvenient government. The lack of grain, experienced by Egypt in 1981, shook the political system, and Anvar Sadat was eventually assassinated. This example is illuminative.

The food market is apt to fluctuations; it is controllable. The prospect of global increase of food prices was obvious already in summer 2007. Both the United States and the EU suspended subsidies for agroindustry. George W. Bush decided to boost use of ethanol as motor fuel. That means increased seeding of technical crops for expense of cereal crops. Global food prices are increasing also due to the devaluation of the dollar which provokes a price hike for stock commodities – including oil, metals, food and particularly cereals. Commodity trade is run by financial speculators. The market is rigid, being controlled only by a small array of players. The demand for commodity futures at the stock markets from all the financial institutions that wished to hedge the currency risks in the conditions of crisis, unfolding in summer, inevitably predetermined a price hike for all the stock commodities, including food (grain, cocoa beans, meat etc.). Regarding the huge amount of "hot" speculative dollars wandering across the globe, only helplessly incompetent officials could overlook the price hike.

The Russian Government was warned about this prospect. However, it preferred to neglect the problem. Meanwhile, it had an opportunity of securing contracts for food deliveries in advance, at least in order to support the poorest population. It had a possibility to introduce a system of tokens for purchase of food in major chains, borrowing this experience also from Western countries. The second array of necessary measures had to be concentrated on strategic food security. The available financial reserves should have been partly mobilized for agrarian programs: particularly, for purchase of breeding cattle, for restriction of export of fertilizers (their producers just being better paid), for employment of qualified foreign specialists in agroindustry – any kind of measures for support of the domestic agrarian sector, known from the experience of the Russian Empire and Stalin's USSR.

In addition, it was essential to cease food speculation. This business is based on loans. The Central Bank just had to address all the relatively strong private banks and warn them against deals with speculators.

These preventive measures were not introduced in time. The attempts to freeze prices will just result in deficit of basic goods.

What we are facing today is the moment of truth for the whole policy practiced since 1998 – or, more generally, since December 1991.

A.K.: Food security is today a bon mot. This term is very popular in the State Duma. Has anybody elaborated any objective criteria of this security? They don't exist – though they have to be embedded in the brains of statesmen. The problem lies not only in the menace of the price hike and the inability of the poorest to subsist. One can't rule out the possibility that one day, importers would just cease to sells us anything, even for big money. Has anybody heard of economic siege? Many countries consider this possibility and undertake all kinds of measures to secure themselves. Take the highly developed Japan. Its agroindustry is non-competitive from any viewpoint. The Japanese government has to purchase rice from its own produces for a price three times exceeding the global price. In this way, it supports its domestic agroindustry. According to the logic of our market ideologues, the Japanese should cease this stupid occupation and purchase food from outside, as that is ostensibly more profitable.

However, the Japanese protect their farmers with an iron wall. They sabotage all kinds of WTO negotiations where the right of the Japanese government to donate the Japanese farmer is put under question. Eventually, Japan even declared its village culture a cultural value, liable to protection from UNESCO and requiring large-scale donations – though these donations will never bring profit. Agriculture just cannot be competitive in Japan, with its scarcity of land and a mountainous landscape, where heavy machinery is unusable. Without governmental support, Japanese farmers would go bankrupt in a matter of a month.

Why does the Government of Japan support the knowingly inefficient agroindustry? It cares for food security, 78% of which is provided by domestic producers. The Japanese don't want to depend on foreign importers of food.

In Russia, development of food imports exceeds 50%. Still, for some purpose exceeding logic and common reason, the Russian Government wishes to join the World Trade Organization. Why?

 

WHY IS RUSSIA DRAGGED INTO WTO?

M.K.: Yes, what is the reason for the Russian Government to strive so frantically for WTO membership? A lot of scientists, industrialists and businessmen have warned that compliance with WTO conditions is draught with deteriorating implications for the economy. Could this illogical behavior be explained just with the mental dependence of the Government officials from the "solely true" Western theories?

A.K.: I've spent years in a permanent discussion with officials responsible for Russia's entry in WTO. This mission was once laid upon Mr. Medvedkov, Deputy Minister of Economic Development and Trade. I used the opportunity of arguing with him, his deputies and heads of the Ministry's departments in the live air of both Radio Russia and Deutsche Welle. Today, they are not much eager to communicate with me.

Meeting with those officials back in 2001, at a session of the Trade & Industry Chamber focused on Russia's compliance with WTO protocols on high tech production, I asked them and the officials of the Ministry of Science: "Does anybody in your ministries calculate what benefits and drawbacks Russia is going to gain from these agreements?" They responded with a question: "Why, is that possible?" I went furious and advised them to inquire an official representative of Hewlett Packard who was also present at the event, about his experience of eight-year talks with China on the conditions of WTO membership. This company, as well as dozens of other companies, was calculating the benefits from access to the Chinese market; the Chinese side was pondering over its own pro and contra.

"What do you mean by saying 'impossible'? Did you address Russia's largest producers of high technologies on what they expect to acquire and which conditions they find preferable? You did not? Why?"

They just shrugged their shoulders. Then I asked a simpler question: "Are you keeping any register of technologies, required in WTO countries?"

The reaction was the same: "Is that possible?"

They seemed to be unaware about the register of technologies accumulated in the USSR in the Institute of Technological Information with its vast library and database.

Okay, I said, then why do you think you are able to lead talks and take responsibility for far-reaching decisions? Whom do you represent except yourselves, and who has given you credentials? And why on earth is the whole country supposed to pay the penalty of these decisions, based on no valid information and calculations?

I came to the conclusion that the officials of both responsible ministries were engaged with anything except what they had to be engaged as professionals. Should you and me compile the register of technologies?

This irresponsibility is understandable, regarding the origin of the career of those guys, picked from junior positions in academic institutions without any background of state management and responsibility even before their colleagues.

After the event was over, they told me in private, seeming to justify themselves, "Just think: what can we do? We are second-level managers. We can hardly influence much. The strategic decision on entry in WTO is already made on the top level".

Why, if you don't have courage to make a stand for fundamental issues in state-level decision-making, why did you take a state employment? In your academic institution, you would be at least free from qualms of conscience…

No doubt: it is convenient from any viewpoint to spend years in the negotiation process with WTO officials. You travel to Geneva, to the World Trade Center, you receive lucrative subsistence in hard currency – why not? Thus, the logic of bureaucrats is understandable. But what about Russian producers? Why don't they try to establish their own channels of lobbyism? They should have long succeeded in replacement of those illiterate government officials…

L.P.: Whose interests is WTO destined to pursue? On the first hand, in the interests of exporters of industrial commodities and for protection of rights of those states which massively export services and intellectual property. Thus, WTO pursues the interests of the United States and the EU. Whose interests is WTO destined to suppress? The interests of those states which export raw materials and possess a large domestic market; those states which venture to replace imports with domestic products and services, borrowing intellectual property from outside. That means that WTO, in any aspect, is destined to suppress the interests of Russia. We have already experienced attempts to jail school teachers who use non-licensed Windows. So, who in Russia benefits the entry in WTO? Those who export capitals – in order to acquire more reliable protection. Russia's entry in WTO is likely to facilitate capital flight, along with jobs and revenues.

In 2004, a group of scientists, hired by the Ministry of Finance and paid by the World Bank, made a research on the perspectives of the Russian Federation's customs policy. They concluded that Russia protects its domestic market very insufficiently: customs duties are small and too roughly differentiated.

A.K.: So, instead of increasing customs duties – at least in order to bargain with WTO and strengthen our negotiating position, Moscow unilaterally dumps the import duties – without any negotiations! How should such a policy be interpreted?

M.K.: In Stalin's era, such a policy would be qualified as an "enemy of the state" behavior, intended to undermine national economy.

L.P.: Dealing with customs policy, we read a lot of letters from companies involved in food processing: the Meat & Dairy Association, the Starch & Molasses Association, etc. They wrote, literally: "You are going to kill us by this entry in WTO! What are our workers supposed to eat? Should they go back to subsistence farming? We'll not be able to compete with Western companies, with their excellent technological equipment and subsidies from their states. Our plants are technologically outdated; they have to borrow for a high interest and pay high taxes. Besides, we have to process production planted in an unfavorable climate of Russia. Harvesting in Moscow Region is much more complicated than in the vicinity of Berlin, given its higher average temperature and thrice more abundant rainfalls…"

M.K.: Thus, Russia's hasty entry in WTO is going to result in a most severe economic devastation. It is easy to imagine what is going to happen with the industry, already heavily battered in 1990s, in a country with no cheap loans, with no sovereign banking system, with no reasonable structural policies, with no guaranteed food security. This entry in WTO may only trigger a crisis which would imperil the very survival of the Russian Federation!

L.P.: Again, we return to the same question: who benefits? Russia exports predominantly to Europe and imports predominantly from the same EU. Entering WTO, we find ourselves in a practically complete dependence from Europe.

A.K.: Russia's dependence from European gas consumption amounts to 52%. Meanwhile, the critical index comprises 26%.

L.P.: We should not delude ourselves, looking at the tricolor above Kremlin. From the economic viewpoint, Russia is increasingly losing independence. The recent gas talks demonstrate that the EU has elaborated a common (!) position towards Russia. No wonder if they once establish a Ministry on Russian Affairs.

M.K.: An analogue of the Ministry of Colonial Affairs that once existed in Britain?

L.P.: Something like that. Remember my words: Moscow is going to encounter a unanimous position of EU nations on all major issues.

A.K.: That sounds pretty realistic. You remember what happened in year 1993, when the domestic aluminum industry, deprived of state orders and domestic consumption, dumped global prices by exporting tons of aluminum? At that time, the EU introduced quotations for aluminum imports, in order to protect its own producers. When Russians tried to circumvent the quotations by exporting aluminum via Estonia, the EU introduced similar quotations for all post-Soviet states. In this way, the European Union that allegedly functions according to the rules of free market efficiently protects itself when it finds necessary.

L.P.: Entering WTO, we'll encounter similar measures on the whole array of imported production, including food. Meanwhile, Russia is critically dependent from the EU in imports of parts and equipment.

M.K.: In this way, the gas superpower will just be beaten cold.

A.K.: Looks how the most advanced market economies introduce purely administrative measures for protecting their economies. Take aircraft engineering. Europe has built up a multi-layer, sophisticated mechanism for protecting the interests of its Airbus, ranging from state contracts and tax leverage to a ban for "too noisy" Russian aircrafts to enter Europe. It is quite clear that the problem lies not in the noise but in the interests of competition. They are just getting rid of rivals, with no regard for WTO provisions.

However, in any case when Russia ventures to establish similar mechanisms of self-protection, the West complains that this policy contradicts to market economy, blackmailing us with reluctance to admit Russia to WTO. Thus, I don's grasp the policy of our negotiators. They make one concession after another. Is there a single issue in which their counterparts have conceded to Russia?

M.K.: Russia is retreating on all of the fronts. This effort to drag us into WTO represents nothing but "velvet colonization" – with no regard for the implications for common Russians. Meanwhile, the policy of the Russian Government completely fits into this design.

L.P.: I am afraid that the political decision on Russia's admission to WTO is already made. At the moment when Russia enters, the EU will seize control over the whole economy. Europe is already driving blatant demands on timber and railway transport. In a huge Russia, railway transportation has always been subsidized. Now, they demand that foreign production be transported on domestic tariffs – that is to choke domestic industry with our own hands. And what about the demand to suspend export duties for lumber? This is equal to an instruction to cease processing timber in Russia and export the whole of it to Finland.

A.K.: Certainly, they protect the interests of Finland, which benefits a lot from processing Russian timber.

L.P.: Thus, the decision to admit Russia to WTO is as understandable as the arrogant demands on particular commodities. The European bureaucracy seems to suspect that after a short while, Russia might get off the hook, and the whole game would fail.

M.K.: Therefore, while these Moscow blockheads haven't yet change their minds on WTO membership, their stupidity is to be made use of – why, an insightful approach.

Thus, we are facing not only a banking crisis, an outburst of inflation and temporary difficulties at the food market – we are facing a systemic crisis of the Russian Federation, a menace of retribution for our reckless liberal policy and short-sightedness of the state. Thus, the process is to be continued.

L.P.: The implications are really hard to imagine…

A.K.: We are facing the aftermath of monstrous incompetence of "free-market reformists" and the policy of "sterilization of excessive money" – ostensibly in order to overcome inflation. We look like a crew of a ship with the bilge caught with fire. Some resolute measures are to be urgently undertaken while the flames are not yet licking out.

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