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. Last Updated: 07/27/2016

Dollar-Choked Russia




It takes a fiendish misunderstanding of economics, or a literal interpretation of language, to believe that "capital flight" refers to a departing passenger at Sheremetyevo airport with a suitcase stuffed with U.S. dollars. I have sometimes thought that Russia suffers no real economic crisis except a crisis of economic confusion.


Russia's problem is not dollars leaving the country. Russia's problem is an astonishing influx of dollars.


Russia has a trade surplus, if no one has noticed, and has had one for the last eight years or so. What does this mean? It means Russia consistently sells more real stuff to foreigners than it buys from foreigners. In exchange for? Dollars into Russia.


If Russia were a kiosk, it would be making a profit. Unfortunately for Russia, this is not necessarily a good thing. Over 200 years ago, Adam Smith contested this mercantilist view by pointing out that a country's economic success should not be measured by the yardstick of a kiosk.


This plain fact about Russia's economic situation has been a thorn in the side of Russians and foreigners alike. It runs counter to the conventional wisdom that Russia has become another of the world's indebted countries. It definitely has not.


Russia's consistent trade surplus means that Russia is now awash, by rough estimates, in about $160 billion in foreign paper, like a profitable kiosk flush with cash. Indeed, given the confusion, it might be best to imagine this $160 billion as not just foreign paper, but green, made-in-the-USA foreign paper.


With that idea, it should not be surprising at all that some of these green pieces of foreign paper have been traded for white pieces of foreign paper - bank statements - issued by foreign banks, and traded through the correspondent bank used by many Russians, the Bank of New York. The white pieces of paper promise interest. The green sort does not.


If investigators of the Bank of New York scandal look at this more closely, they'll no doubt find lots of foreign paper owned by Russians, foreign obligations to Russians in computer code, being traded for other foreign paper - paper from Cyprus, Switzerland, Luxembourg and God knows where else. Russians own a heck of a lot of foreign paper.


What is this foreign paper anyway? I lend calculators to students and they give me a chit in return. Somebody gets a chit, and somebody else gets the calculator. The foreign paper means Russians are lending their calculators abroad. They expect to get the real thing back some day. If Russia were a family, it would be saving.


Incidentally, it is illegal for Russian citizens resident in Russia to have assets abroad. Well, if Russians have chits of the green foreign paper variety, it means their real assets - like the calculators - are being used interest free by the U.S. government. By some estimates, $40 billion of that $160 billion is held in Russia as cash. If that money were held as Treasury bills at 5 percent, U.S. citizens would have to cough up about $2 billion to Russia every year for the use of these real assets. Is that money laundering? Doubtful. The current situation is more like an interest-free gift from Russians to U.S. taxpayers.


On that note, has the Russian policy of President Bill Clinton's administration failed? Apparently, yes. Administration officials wanted to help Russians and instead they fostered an interest-free loan to the U.S. Treasury, courtesy of the Russians they wanted to help.


The Russian rejoinder to the rumblings in the Western press about the Bank of New York is simple: Boring. Rich Russia, so this response indicates, is poor because of theft (read: money laundering).


But this is misleading too. Of course, there is theft in Russia. But in a country where it is often not clear who owns what, the wasteful bickering to determine ownership deserves far more attention.


Russians are not poor because of theft, they're poor because of waste. Russia wastes its vast wealth on a scale that defies description.A thief gets something for his effort, but nobody gets waste.


The real story here is that Russians save the only way they know how.


They sell real things to foreigners and get low interest savings account bank statements, or U.S. dollars, in return. Lousy foreign paper.


Does anybody out there know how costly, how wasteful it is for individual Russians and for the Russian economy to save by keeping U.S. dollars in drawers? To say nothing of how dangerous and insecure such a savings system is. Very few people in the rest of the world manage their savings this way.


These lousy loans on lousy terms to the West offer only a minor glimpse into the scale of economic waste in Russia. The headlines in Russian newspapers this summer began to approach the truth by noting that Russia's problems are not primarily macroeconomic. They are - and have been - microeconomic. By talking about stealing - or the theft of microeconomic equity - the headlines are getting even warmer. Personally, I'm waiting for the headline that says it all: Russia wastes. Will anybody get it?


James Roberts is professor of finance and economics at Moscow University Touro and coordinates its U.S.-accredited MBA program. He contributed this comment to The Moscow Times.