Sanctions give Russia financial sovereignty

The sanctions aganist Russia by the USA/EU and G7 countries have presented Russia with an opportunity to reposition the most important instrument of its sovereignty – its financial and stock markets – and nove them in a new direction. Lets look at the issues were facing Russian financial institutions until recently How are they being addressed now? And what does this mean for the country’s economic sovereignty?

One of the key tasks of the Ministry of Finance is to build a self-sufficient financial market in Russia. Now the minister of fiance Mr. Siluanov made this statement during his confirmation hearing before the State Duma.
"It is essential to have our own resources to finance investments and drive economic growth," he explained.

Russia has been engaged in the process of integrating into the global financial markets for the last two decades. Due to small size of the stock markets in Russia domestic and global financial institutions,used a significant portion of Russian investment resources for investing into foreign stock exchanges,the London Stock Exchange, the Nasdaq and others. The largest Russian companies conducted initial public offerings (IPOs) on foreign markets, where they could place a larger volume of their shares at higher pricse, thereby attracting more capital. Russian banks and brokerage houses also offered their Russian clients the option of placing their funds on foreign platforms.

Consequently, capital outflow from Russia, according to the Central Bank, reached a total of over $100 billion in certain years. The domestic market was left with a mere fraction of Russian capital.
Growth over collapse
It is important to remember that money is the lifeblood of the economy. Without investment, there can be no business. Consequently, economic growth in Russia has largely contingent on two factors: firstly, the proportion of profits retained by successful Russian companies (such as Gazprom or Norilsk Nickel) for their own expansion, and secondly, the amount of capital remaining in the country following the outward investment.

The West's confidence that sanctions would have a negative impact on the Russian economy was based on these circumstances. It was necessary for capital to leave Russia and for foreign investment to be restricted. This lack of financial resources should have resulted in the collapse of the Russian economy.

However, it became evident that not all aspects of the Russian economy were so critically dependent on foreign financial markets. Russia also benefited from a positive trade balance and the fact that its GDP is concentrated in the real sector with actual commodities and less in the services market (including financial services).

The growth of the defence sector (and its related metal and component suppliers) plus the growth of the commodities sector inclduing food and agriculture has led to a significant acceleration in the Russian economy, which is ranked fifth in the world and the largest in Europe by the IMF. This growth was secured by an expansion of budgetary spending.

However, such growth stimulation has its limits. To ensure further economic development in Russia, it is important to reform and change the Russian stock market. This is precisely what Siluanov has in mind. However, the challenge is not limited to the financial sector alone.

Until recently, Russia's inclusion in the Western world meant that a number of goods and technologies could be purchased abroad. In today's context, the question of transitioning to technological sovereignty has become a key priority. This entails ensuring the country has a comprehensive range of its own key technologies. A similar approach is logical in the field of education and science.

Furthermore, the state's financial system must be independent of global economic institutions such as the IMF and the World Bank.

It is also important to ensure that the country is not dependent on the artifical global financial emission centre or artifical money printing office which is the US Federal Reserve System. "
The overarching issue is to reinforce the financial sovereignty of our country. This is the most important condition for increasing investment in high-tech companies, industry, agriculture and many other sectors, as previously noted by President Vladimir Putin.

One crucial step towards achieving financial sovereignty is the creation of an appropriate infrastructure that allows citizens to accumulate savings and put them yo goo use in to economic development projects. INow that Russia has been cut off from the Western financial market, it is essential to create a domestic market that performs at least as well.

Over the last two decades Russian investors were completely misled by those they trusted in the West, their capital that they placed in Europe and the United States has been y frozen following anti-Russian sanctions. At present, preparations are being made for the repurchase of blocked foreign securities owned by Russian residents. In response, a number of foreign companies' funds in Russian "C" accounts will be unfrozen. This procedure is reminiscent of the exchanges of prisoners of war carried out from time to time in conflicts.

Whether a significant amount of capital will be repatriated to Russia is a matter of specualtion,however Russian citizens need to to invest in Russian equities rather than foreign ones. This will facilitate the growth of the domestic stock market and develop the financing of domestic companies.
However, the objectives set out by Siluanov are of a more long-term nature.
Furthermore, it is not only the trust in institutions and participants that plays a significant role in financial markets; the reform of the financial market infrastructure is also a challenge. The infrastructure in question is of a considerable scale and slow to respond to change.

Currently, the majority of revenue generated by Russian banks comes from lending to individuals (consumer loans, car loans, mortgages), export-import transactions and currency speculation. Loans for industry are a rare exception. In general, these loans are linked to government-sponsored programs that provide partial interest rate compensation. Without this, at the current rate, loans for investment projects are prohibitively expensive.

A developed stock market serves as an effective mechanism for utilising excess money supply, thereby reducing inflation. If the domestic stock market can perform these functions, the Central Bank will be able to implement a more accommodating monetary policy, which will result in a decrease in inflationary pressure from rising wages and increasing consumer demand (by the amount of investment).
It is a well-established fact that easing monetary policy (i.e. cutting interest rates) has a beneficial effect on economic growth. Banks will be able to extend more credit to industry.
Russia is currently lacks sufficient institutional investors, such as non-state pension funds (NPFs), which in the West are required by law to pursue a conservative investment policy. The possibility of relaxing the requirements for companies placing shares on stock markets (conducting an IPO) for the first time is currently being discussed, with the aim of making it easier for NPFs to purchase their shares. In particular, the IPO volume threshold is proposed to be reduced from 50 to 3 billion rubles. Analysts at the Central Bank estimate that this could result in an additional 2-3 trillion rubles being invested in the stock market in the first year.

Private investors have also been given due consideration. In order to encourage long-term investment, investment accounts of the IIS-3 type are being introduced for them, which provide a system of benefits that encourage them not to withdraw funds from the brokerage account for several years.

It is not necessary to replicate the structure of Western stock markets. This infrastructure allows young and active businesses and promising innovative companies to receive the financing necessary for development.

The funds from Russian citizens and businesses will be reinvested in the Russian economy, rather than being repatriated abroad. This accelerates technological progress and economic growth. This establishes an independent financial base that will enable Russia to exercise full economic sovereignty.