Igor Lipsits: “We are in a world where there are very few reliable currencies”
Professor of the Higher School of Economics Igor Lipsits — about the possible collapse of the dollar and its rise to 100 rubles
November 2 marked the 30th anniversary of the decree of President of the USSR Mikhail Gorbachev on the commercial exchange rate of the ruble to the dollar, at which the American currency could be freely purchased and sold by any citizen of our country and used in the calculations of certain operations. Igor Lipsits, Doctor of Economics, Professor at the Higher School of Economics, told Realnoe Vremya in the interview about why the dollar is hardly a profitable currency for Russian citizens now like it was in the early 1990s, whether the state will abandon the dollar, whether there are serious threats of collapse for the dollar, and why the dollar is real at 100 rubles in 2021.
“China is not eager to make the yuan a reserve currency”
Doctor Lipsits, 30 years ago the dollar was considered the most reliable and main currency — both in the world and in our country, where it could be bought without any restrictions. Can the US currency be considered as such today?
We probably can't say that because we are currently going through a period of transformation of the currency market, and it is also impossible to tell where this period will lead us. The reliability of the dollar is now quite problematic — now we are all waiting for the US elections, what they will lead to — we do not know. God forbid a prolonged civil conflict will begin in America because of the non-recognition of the elections — this can lead to a large volatility of the dollar.
Therefore, we cannot say that the dollar has become the strongest and most reliable currency in the world — the dollar's authority is based primarily on the authority of the federal government of the US, on the fact that it always pays off its debts, and if perturbations begin to occur in the highest echelons of power in the US, this is just a blow to the stability of the dollar.
The only trouble is that there are not so many alternatives to the dollar — the euro is unstable due to the political situation in Europe and it is also impossible to predict its future as a stable currency. The thing is that the stability of the euro relies on the stable economy of Germany, but in a year Germany will change the chancellor, and how it will be — we don't know because Merkel has no serious successor, and because of this the euro is unpredictable. As for the yuan, there is also no alternative — China is not eager to make it a reserve currency.
Thus, now we are in a world where there are very few reliable currencies, and the dollar is definitely not the currency one should keep their savings — such a weird stretch.
As for the yuan, there is also no alternative — China is not eager to make it a reserve currency
Is this strange stretch that the currency world has fallen into related to the events of 2020 or there are other longer-standing reasons?
This is a very serious topic. The thing is that the world economy always has a leader, and the country that is the richest, most successful, and most cost-effective sets the rules of the game in the world market. Once such country was Spain, then there was a period when Holland became such, then the UK, and then the flag of leadership passed to the United States.
But there is a theory held by economic historians, and it is, I would say, geographical one — it says that the palm of leadership circles the world from East to West. In accordance with it, China will be the next leader of the world after the United States. But China does not want to become the world's leader yet and is not ready for it, and because of this, a period of turbulence begins — the United States is losing world leadership, China is not ready to be such and, accordingly, is not ready to make its currency a reserve one, and therefore a period of instability arises.
We have already been through this — in the 20th century. The UK was losing its leadership position, and the US could assume the leadership, but did not do it immediately, and only the 1930s became the time of leadership transition, and after the Second World War, the US finally became the world leader, and the dollar became the most desired currency in the world.
It is now obvious that we are experiencing a transition of this leadership from the US to China — this is already evident in the size of total GDP, in scientific and patent activity, in which China is ahead of the US. Certainly, the US does not agree with this and is trying to maintain its leadership in every possible way, but China is not trying to make the yuan a reserve currency, and therefore there is an unstable streak.
Maybe all these worries can be in vain and everything will be much calmer — Trump (or Biden) may well admit defeat, and the currency will not suffer? Is such a familiar option completely unrealistic?
Even American observers do not know this, and even more so it is not for us in Russia to assess it. If Facebook, for example, was sure that everything would only be in the form of minor scandals and everything would be stable, the social network would not introduce new regulations for the period after the election, when it may be unclear whether the election results would be recognised or not.
Today, out of 250 million voters there, 60 million have already voted by mail, which annoys Donald Trump, and of course, the chances that there will be a streak of instability in the United States are quite high. You see, I follow the situation in the United States very closely and it is obvious to me that the country is divided — there is no consensus among the ruling elites, there are no striking leaders, there is no interesting concept of the country's development that would unite the Americans, so I assume that in one way or another, the US will return to the Monroe Doctrine.
Today, out of 250 million voters, 60 million have already voted by mail, which annoys Donald Trump, and of course, the chances that there will be a streak of instability in the United States are quite high
The Monroe Doctrine is an old political doctrine, according to which the US had lived up to the beginning of the 20th century and that stated that America does not care about the entire world, except North America and Latin America, and thus, the fight for reserve currency is not as important, since all are important to the US takes place inside the American continent. Whether all this will actually happen, I don't know, but judging by the statements of Trump, and even more so Biden, it may all come down to this. It all depends on the policy.
“Russian manufacturing business cannot live without imports”
How do you assess the role of the dollar for the Russian state today, in 2020?
The Russian dollar still plays a big role for the state. Look, Russia is living and surviving at the moment purely by exporting natural resources and nothing else feeds us. Thank God that we know how to extract natural resources — they allow us to buy food, medicines, various medical equipment, and various equipment so that the country can live.
If there were no dollar revenues from oil, Russia would live much worse — approximately at the level of the poorest countries in Africa, and thus, the dollar pleases Russia — commodity markets are still tied to the dollar, and although there are attempts to transfer payments to the euro and the yuan, there is no dramatic situation for Russia yet.
In other words, is the long-term course of the state to receive dollar profits, and not in yuan, obvious?
What else we they do? Of course, we are now trying to expand our oil and gas flows to Asia, but whether it will work out or not — there are different estimates about the future of such projects, because there are paramilitary conflicts between China and its neighbours over gas fields in the Yellow Sea. And if China finds its own deposits, the yuan will no longer be a source of income, as some politicians see it now. This is why Russia is tied to Europe — our revenues are in euros and, of course, in dollars, and nothing can change here.
If we are talking about businesses, for example, about the average, for them, is the dollar more of a minus than a plus?
The Russian manufacturing business cannot live without imports — we have no components, no raw materials, no modern materials, and they are very dependent on the dollar. This week, the media has reported that Sberbank has become the main owner of Eurocement, Russia's largest cement company. Until recently, everything was good and nice in this company, but a lot of foreign currency loans had been attracted for business development, and now the situation has become bad and Eurocement has passed into the hands of Sberbank, which will try to sell it to someone. Foreign currency loans, which were supposed to help the company develop, pulled it to the bottom. So our businesses will not go anywhere from the currency, from the dollar — if there are no loans, then there are payments for materials from abroad, and these are resources estimated in dollars.
Foreign currency loans, which were supposed to help the company develop, pulled it to the bottom
The dependence of businesses on the dollar, as I understand it, has not weakened in 30 years of market relations in our country, has it?
How could it? To do this, the country needs to do something for the development of industry, which means that we must talk about investment. And if we are talking about investments, then we are talking about the profitability of investing money in Russia by investors who have this money. But the situation in Russia has been unstable for 30 years: we had a period when it made sense to invest in Russia for about 11 years — from 1999 to 2010, and, perhaps, until 2012, because the market was growing and it made sense to create our own production.
But after 2012, it got worse and worse, and after 2014 it got really lousy. But if no one invests, then everyone take money out of the country. Look, this 2020 year, the outflow of capital from Russia exceeded the estimates and forecasts of Sberbank! Fifty-three billion rubles are being withdrawn — the money that has not been invested in establishing own production. And how can the dependence on imports and the dollar be reduced there?
Just recently, I've made a video for my YouTube channel about one of our motorcycle factories, where its executive says that we assemble almost the entire motorcycle from imported components because absolutely no parts — even light bulbs for lanterns in Russia can not be obtained, and, as disgusting as it sounds, but the Russian motorcycle Ural is assembled from imported components. What can we do if there are no other components?
“We are dependent on the currency very much”
In Russia, the dollar exchange rate these days again has gone beyond 79 rubles — probably affected by another drop in oil prices to 36-37 dollars per barrel. Meanwhile, even officials (though last year) said that the real value of the dollar is around 55-60 rubles, and I think businesses would be happy with these figures. What is its price — of the dollar in Russia? Is it speculative? Is it artificial?
This is exactly the rate that the officials were talking about — artificial. They take a certain basket, calculate the parity and “find” the rate that is sought. But these are all artificial calculations — the real exchange rate is determined by the market, and nothing else exists.
People are very fond of using the term “fair price”, but this is absolutely a false concept: there is no fair price for the same dollar, there is a market price — the price of supply and demand, their balances and interactions, and what we are now seeing in the foreign exchange market is the real price. And all calculations are expert estimates that some models have. But if the market does not confirm these calculations, what is the point of these models?
The dollar in Russia is a commodity, and its price is determined by supply and demand: in Russia, there are still more people who want to buy the dollar than people who sell the dollar, the product is in short supply and its price is rising. And let artificial assessments remain on the conscience of experts — they have very little relation to life.
The dollar in Russia is a commodity, and its price is determined by supply and demand: in Russia, there are still more people who want to buy the dollar than people who sell the dollar
Since 2015, the dollar in Russia has been floating more freely than before — when there was a currency corridor. Did this decision prove to be correct?
As I said, the dollar is a market commodity and it is better not to interfere with it. When we interfere with it with the help of the Central Bank, it can't be a good story — after all, Russia needs dollar resources for a more dangerous situation, which is also possible. Certainly, the Central Bank cannot ignore the dollar exchange rate completely, and, as you know, the regulator has recently been trying to sell more currency than buy, so that there will not be a big dollar hike because otherwise it will have a very strong impact on the economy.
Yes, some people here say that the currency is an external phenomenon that has nothing to do with the life of a Russian person, but this is all absolute nonsense. Why nonsense? For example, there has recently been a fuss about wheat prices — since the ruble depreciated, our trading companies say that it is very profitable for us to export wheat abroad, and if you want us to leave grain in Russia, you should recalculate prices based on the dollar. This means that all this will hurt the baking industry, and bakers have already run to the government with a request to subsidise them.
Thus, we are dependent on this currency very strongly, and if we earn money by exporting, we will not move anywhere from this moment — the dollar very much determines the state of our economy.
Doctor Lipsits, what is the US dollar based on now? Does oil from the Eastern monarchies play a big role in this, as previously? Or is it that the economies of many countries are tied to the dollar?
The dollar rests primarily on the US economy and the federal government of the US — everything else is from the evil one. Until now, the US are fulfilling their obligations on their securities, and there is no other factor for the stability of the dollar — and this factor will remain. Why?
Now we are in the economy of the twenty-first century, and the situation is such that the most valuable resource is not oil at all, but high-tech products that largely determine the life of the world — we are now talking to you via the Internet using the same products.
And these products are related to the American economy, because the US has acted as a kind of hub of talents for several decades. And because of this, America is the intellectual centre of the world — products from the United States are needed, desired, paid a lot of money for, and all this determines the strength of the US economy.
Now China is trying to gain control of the situation — they are also trying to become a hub of talents, developing higher education, creating research centres, but still loses the US in the creation of important products: although China has surpassed the United States in the number of patents, but the real value they are lagging behind and all the hi-tech world today is predominantly American. In general, the leading position of the United States and a strong dollar is already based not so much on oil as on intellectual products.
“In Russia, the currency for ordinary people is losing its significance”
The crisis of 2008 was severe and started in the US — why did the dollar withstand?
The domestic economy of the United States remains as it was then. If you remember the crisis of 2008, you know that it was caused by financial problems in the real estate market, caused by the mortgage crisis, and since it was not related to the basic problems of the economy, it was possible to flood it with money.
But it was not so much the government that flooded the crisis with money — the mechanism was launched by the Fed and since then it has been working both in the US and in Europe. This mechanism is to pump money into the economy, and since then there are no borders for printing money in the US: they can issue as much money as they want and use this money to pay off their problems, and the burden of this debt falls on the rest of the world. The mechanism is fantastically successful and therefore they do not experience problems and may not experience them for a very long time — only some internal problem can destroy America and bring down the dollar.
China is also trying to become a hub of talents, developing higher education, creating research centers, but so far it is losing out to the US in creating important products
Then why in the 2000s and then on television, on the radio, people heard forecasts about the collapse of the dollar and so on? Was there any reason for this?
But who made these forecasts? All sorts of pseudo-economists — they have been predicting a collapse of this “unfortunate” dollar in my memory for twenty years, kept saying that the US have a huge national debt and it would soon collapse, that there would be another era and another world. But none of this happens, because the US are the best at getting out of crises and always successfully sell their intellectual products, earning a lot of money.
And the Americans develop their own oil and gas industry precisely at the expense of their own successful products! After all, few people talk about it, but let's remember that America has banned oil exports for decades since 1967, and only now the terminals for sea vessels for transporting oil are being gradually reactivated by the Americans, and they are starting to export oil. As for gas, they are now literally struggling to enter all ports in Europe with their liquefied natural gas (LNG) and are quite successfully selling it — don't forget about it. So the US have everything — it is a country as rich in natural resources as we are, but they are much better able to use it all for themselves and for exports, which means that the resources of the US economy are quite large.
The Central Bank will probably restrain the growth of the currency, the growth of the dollar, but when your colleagues, for example, Sergey Khestanov, say that we can see the dollar for 100 rubles, so there are reasons for this, aren't they?
Everything is possible. The point here is not even what the dollar exchange rate will be, but on what horizon you predict this rate. Let's remember — in the summer of 1998, the dollar was 6,5 rubles on the market, and now it goes for almost 80 rubles, and we can not exclude that it will reach 90 rubles. Why? If the ruble has depreciated 15 times in 22 years, if the Russian economy does not get any bigger, if it does not export a wider range of products, and the inflow of currency to the country does not grow, if the need for currency becomes greater (because components have to be bought for dollars), then the dollar may cost 100 rubles at the beginning of 2021.
It is more difficult to predict the return of 60-65 rubles per dollar, because it is absolutely unclear at what expense this can happen.
When the crisis of 2008-2009 unfolded, your colleague at the HSE, former minister of economy, advised citizens to keep money equally in euros, dollars and rubles. Is the advice relevant or should people already lean more towards the dollar?
If you live in Russia, this advice is not quite appropriate. If we look at the statistics now, we will see the opposite picture — Russians are taking their foreign currency deposits and converting them into rubles, because now there has been a certain turning point in Russia. Since 1992, the dollar in Russia has played the role of a means of saving treasures, and it was a great happiness if you could save at least some of the money that you earned today for the future in the currency that only became more expensive and preserved its purchasing power in its preserved state.
But now the situation with the dollar in Russia is different — we have zero deposit rates, many banks refuse to open deposits in dollars and euros at all — you can only keep them in a current account. And we can see people refusing to keep currency savings and they are converting them either into metal gold accounts or into investment instruments in the stock market, so the situation has changed.
Of course, it is desirable to have some part in the currency, but since the yield on the currency is small, it makes sense to act a little differently. Yes, it is necessary to increase the share in rubles, but invest them in some securities — for example, bonds with a yield of up to 7,5 per cent per annum. Therefore, it needless to say that the dollar is “funeral money” — the yield is zero, and we can get to the point that it will be unprofitable to invest in the dollar. Again, in some countries where there is deflation, there is a risk of a negative rate on foreign currency deposits, and you pay the bank for keeping your money, otherwise they could be stolen from your apartment by robbers. I see that in Russia, the currency for ordinary people is losing its significance — people are switching to other profitable instruments.
It is difficult to say about Biden's future actions — he is an elderly man, and there are fears that he will not last long in the chair, and it is also difficult to say how his partner Kamala Harris will act
I would like to finish with the US, because the dollar is the currency of the United States. After all, whose chances of taking the White House a few days before the election are greater and how can this affect the dollar?
So far, at the moment, Biden's chances are higher, and his gap from Trump is significantly higher than it was for Hillary Clinton in 2016. How it all will end is unclear because it is difficult to say about Biden's future actions — he is an elderly man, and there are fears that he will not last long in the chair, and it is also difficult to say how his partner Kamala Harris will act.
Now the situation is such that it is extremely difficult to predict something with the currency. Of course, it seems that we should think that neither Biden nor Trump should reasonably undermine the reputation of the dollar, but today in America the word “reason” has taken a back seat. And I fully assume that after the election, America may enter a sunset situation — investors may start fleeing, rich people may flee, and therefore the US economy may decline. Just these days, it has become known that the Democrats are preparing a noticeable increase in taxes on the rich, and after that, no one will dare to say what will happen to the dollar after the election.