Is Russia Playing Fiscal Roulette?

For starters, let us consider the year 2005. At that time, Russia's exports exceeded $250 billion. The owners of these resources - exporters - sold about $220 billion on the domestic market, at a rate of about 27 rubles per $1, thus receiving about 6 trillion rubles as a result. Had the Central Bank of Russia (CBR) not interfered in the currency trade, the dollar exchange rate would have been based on free market principles - that is, substantially less than 27 rubles per $1. In 2005, it would have been, for example, 14 rubles per $1 and raw materials exporters would have received not 6 trillion rubles but only 3 trillion for the hard currency they sold on the internal market.

To prevent this from happening, the Central Bank regularly issues so-called cash emissions - a practice that is completely beyond public control. In other words, it prints and puts into circulation money that is not covered by goods or services, spending it on the currency exchange as the largest buyer of foreign currency. The level of this intervention is such that it ensures the maintenance of the U.S. dollar rate on the exchange market. For example, in 2005, the Central Bank had to buy about $70 billion for that purpose, paying about 2 trillion rubles. Thus, it was forced to issue an additional 1 trillion rubles.

By keeping the dollar exchange rate at 27 rubles per $1, the financial authorities forced the whole country to buy dollars from raw material producers at double their market value. In other words, in addition to the Central Bank, the country's population directly or indirectly bought another $150 billion from the raw materials exporters for 4 trillion rubles, thus paying them 2 trillion rubles in excess.

It must be said that foreign exchange is bought not only by those who buy it outright, but virtually by all those who pay for related services and goods. Thus, in 2005, as a result of Central Bank manipulation, raw materials exporters were paid about 3 trillion rubles over and above what they should have been paid.

But this is only half the problem. In this context, the price of raw materials and related resources in Russia tends to exceed the normal domestic market prices by two or three times.

In a free market economy, one of the main price regulators on the internal market is the price of analogous imported goods.

For example, if cement imported from Bulgaria costs $50 per ton, with the dollar exchange rate of 14 rubles per $1, it would be 700 rubles per ton of cement excluding transportation costs, import duties, VAT, and other overheads (1,400 rubles per ton including all of these). But with the rate of the dollar twice as high, the price of Bulgarian cement on the Russian market will be in excess of 3,000 rubles per ton, which will enable domestic cement producers to offer it at 3,000 per ton.

Furthermore, due to certain specifics of the Russian market (large distances, artificially sustained local monopolist practices, the private interests of the procuring agencies, etc.), the price of cement can be as high 4,000 rubles per ton, whereas in Bulgaria it will be $5 per ton.

To sum up, as a result of CBR policy, Russians have to pay the raw materials producers double or triple the amount they should. Moreover, sometimes people simply do not know about this because they do not buy the majority of raw materials or related goods directly. Therefore, they are mostly outraged by the soaring gasoline prices. At the same time, they also overpay for natural gas, electricity, mineral fertilizer, and diesel fuel when they buy foodstuffs and pay their utility bills; for aviation fuel when they buy air tickets; for paper when they buy books and newspapers; for cement and other construction materials when they buy or build homes; for heating oil and coal when they pay for heating, and so forth.