July 6, 2016

What Prevents Us from Being Strong?

The Independent Analytical Center for Geopolitical Studies “Borysfen Intel” affords ground to the analysts generation for expressing their point of view regarding the political, economic, security, information situation in Ukraine and in the world in general, according to their personal geopolitical studies and analyses.


Note that an authors’ point of view
can disagree with the editor’s one

Valeriy Shvets

Most of our conclusions about the world we do based on comparisons. We compare and regularize, placing the objects of comparison in a particular sequence. There is the first place, the second, the third, etc. Comparison is based on real numbers — these are the only objects of mathematics, about which we can say “this number is larger”.

But how to be with such characteristic of the state as the efficiency of its state apparatus? Over the years of independence, this unit has grown and tends to grow  further. Now it includes some 370,000 people. In Soviet times, it was at the level of 60 thousand people. But in Soviet times, the state controlled everything: agriculture — what and where to plant, when and how to harvest; how many pairs of shoes of different categories to make, how and at what price to distribute them among the population; what to buy and to sell abroad; what to read and what to watch at the cinema and on television; what to consider good and what— evil, and so on. That is the state used to determine the strategic, albeit illusory, purpose of the existence of the country and its citizens. In a word, because it is a totalitarian state, it has to control everything.

And what kind of state is the independent Ukraine? Probably not totalitarian yet, although it will certainly be one at the current pace of bureaucracy. The state no longer controls anything, neither agriculture nor industry, nor the customs — the latter has become an effective mechanism for the destruction of its own producers in favor of the private interests of the customs officers themselves; nor law enforcement in the courts — which have become an effective mechanism for the destruction of public morality for the sake of private interests of judges; neither domestic trade nor foreign one. Finally it turned out that the state is unable to control even its own borders, let alone its own information space.

Now the state is allegedly leading the fight against corruption, although it itself is its main source. But why, being not responsible for aanything, the state apparatus over the years of independence has become times larger? The answer is simple — food supply for the officials has increased manyfold. The Soviet Union looked like a military camp. Since the 1930s, the number of weapons in it was equal to the number of weapons around the world. It had nearly always been so. Having left the horde — an army aimed at conquering the world, Muscovy remained a horde. Muscovy's heir was the Soviet Union, which changed only the name, having not changed anything in its nature. Food supply in a military camp is very limited, and the orders are strict. One can't get too rich on production of tanks and Kalashnikovs. Consumer goods were few, and they were of poor quality. Imports of high-quality goods had been limited and from it, actually, the degradation of the state apparatus of the new empire began. In a market economy, the situation is quite different. It is like comparing a desert with  almost no water, to a flourishing oasis with more than enough water.

The qualitative picture of what is happening is more or less clear. It is the same all over the former Soviet Union, but we need the numbers for comparison. Do not look for these numbers in newspapers and television reports. They most likely will disorient  you. You'd better go to the nearest solid bank and find out the value of the bank interest on deposits. It will turn out that the percentage of deposits in national currency is at the level of 17-20 %. The more reliable the bank, the lower the percentage. In high-risk banks it can be even  27 %. Sounds nice. You open a deposit for 1000 hryvnyas, and a year later you will have on your account, for example, 1200 hryvnyas. How is the percentage formed? In order not to go bankrupt, the bank must give someone your money on credit at high interest rates, for example at 30 % per annum. A year later, of these 30 %, the bank will return you 20 % and will leave 10 % for itself as profit. In order to return the loan on time and still make a profit from the use of the loan, it is necessary to invest the loan into business, which gives, for example, 40 % of profits annually. Then 30 % is returned to the bank, and 10 % remains as a profit to those who took out a loan. But who will take the credit from the bank at 30 % per annum? Is there a legitimate business, which gives 40 % of profits annually?

The answer is, with rare exceptions, no. If banks existed only at the expense of these loans, they would quickly go bankrupt without exception. So banks exist mainly due to not hryvnya credits. Then, thanks to what? My answer is — thanks to inflation. If the bank's interest on deposits is 17 % (a completely private Privatbank or Ukrgasbank with predominantly state capital), the inflation rate should be higher, for example, 25 %. To pay off depositors and still to make a profit, the bank should maintain its money from inflation put on the deposit, buying, for example, US dollars. Then, in a year, the dollars can be re-transformed into hryvnyas. Now there will be  1250 UAH, so 1170 UAH will be returned to the owner of the deposit, and 80 UAH will be left in the bank as its profit.

And how does the bank know the rate of inflation? It does not know it. If it is wrong in its estimation, it ends in heavy losses, and possibly bankruptcy. In fact, the picture is even more complicated, because due to inflation not only hryvnyas become cheaper, dollars also do, although in different proportions.

Hence the first conclusion: the real value of national currency deposits does not increase over time, it decreases. However, it is still advisable to keep hryvnya deposits, because their depreciation as a result of inflation, is partially compensated by the bank.

The second conclusion: the rate of inflation, i.e. the depreciation of the hryvnya, is always higher than the bank interest on deposits in reputable banks.

Interesting is the behavior of banks under abnormal decrease in their financial resources through various activities. They usually refer to the National Bank for refinancing. Having received the appropriate credit in the hryvnyas, they immediately exchange the hryvnyas for foreign currency on the Interbank Currency Exchange. Due to the increasing pressure on the national currency, its exchange rate falls, and banks again, converting foreign currency into hryvnyas, profit, easily recovering debts in national currency. Particularly successful this operation was during the latest  unprecedented fall of hryvnya threefold in a short time. And how much can earn the person who presses the button of inevitable sharp fall of the national currency, choosing the moment to press?

In the financial world, there are also fundamental conservation laws. If someone suddenly becomes rich, someone is sure to become poor by the same amount. Who has become poor? We have! Who has become rich? Somehow, no one asks this question out loud!

So what does interest rate has to do with the effectiveness of the state apparatus? A lot. The source of the depreciation of money in the country — inflation — is always a state itself. In a market economy the state has only one mechanism to cover all its losses due to its own  inefficiency — it is printing money. The state does not know how to calculate and control its costs or does not want to do so. Between the desired and the actual there arises abyss. This abyss is covered by the state in the simplest and most dangerous for itself  way — by printing money, not backed by new products and services. Banks at this play the role of a thermometer that indicates the increased temperature due to the disease, but they are not the source of the disease. What is the danger of inflation? The impossibility of lending to the real sector of the economy. 5 % — is a good income for it. For its normal functioning and development the cost of loans should not exceed 2-3 % per year. In our country it is 20-30 %.

So, the bank's interest for the national currency — is the temperature of the patient. What is this temperature in different parts of the world, if you focus on leading banks and national currencies? In Russia it is about 10 %, in Poland — 1.2 %, in the UK — 0.75-1.5 %, in Switzerland — 0.5-1.3 % (in solid banks it is negative), in Germany — 0.05-0,3 %, and  finally, in Ukraine — 16-22,5 %. Do you see how  Ukraine differs from the rest of the world? Russia also differs, but even against its background we look very disappointing. Unfortunately, the worst things are now in Belarus, where inflation rates remind inflation in Ukraine in the early nineties.

There is one more unpleasant circumstance in the financial life of Ukraine. Almost every year we have a negative balance of payments. That is, each year the country exports more foreign currency than it receives at the expense of exports and loans. Where does the excess of exported currency originate from? I think that it happens at the expense of our workers, millions of whom beg around the world, earning for their families minimum incomes in foreign currency and sending them to Ukraine, bypassing the banking system. That is, the country exports almost all the currency. A logical question arises. Then why do we need foreign currency loans from international financial institutions?

My answer is this. Hryvnyas, accumulated in Ukraine, can't be taken abroad. First, they need to be converted into Euros or US dollars. Foreign currency can be bought for hryvnyas only in Ukraine. An important supplier of such currency is the state. That is, increasing the national debt of Ukraine, the country imports Euros and US dollars. Further, in one degree or another, this currency falls in private hands and is exported abroad as private capital. It should be noted that a part of the taken abroad  currency returns as consumer goods. This is a sort of compensation to the citizens of the country for their agreeing to total robbery and destruction.

And how much money is there on foreign accounts of our rich? Based on the structure of Ukraine's balance of payments, to the external public debt of Ukraine we should add all the money earned by our employees and brought to Ukraine, and most of the funds received from our exports. Well known is only the first component of this amount — the external debt and publicly guaranteed external debt — 1 trillion 122 billion hryvnias. Probably this number should be multiplied by three or four to obtain the overall result. These funds would be quite enough for modernization of the country: creation of modern infrastructure; construction of new enterprises based on modern technologies; development of Ukrainian culture and science, as its important component, without which national revival is impossible.

I hear all the time that getting the next tranche from the IMF — is a signal to international investors for their activation in Ukraine. In the present circumstances, no serious investor will come to our country. No one will bring to our country the money, watching how we are actively exporting it at the first opportunity. That is, the next tranche of the IMF is another sop to our elite for its loyalty to the West. Is our elite at this loyal to the Ukrainian people? This is a great question. Sharing out of the country continues. Anything that can be sold abroad is sold abroad, and the proceeds usually remain there. There are no signs of the country's modernization. From the businesses that were inherited from the Soviet Union, are squeezed the remnants of their capacity. New enterprises are not being built, the old ones are actually not modernized. For politicians and oligarchs the time horizon of their aspirations does not exceed a few years. Everything is already divided, except land. This will probably be the last action of a great sharing out of  Ukraine.

Ukraine is facing many threats.  One of them is mentioned in this article. A robust financial system is needed by a modern state not less than an efficient army. We need a victory in the Russian-Ukrainian war. Recall that on the eve of the First World War all the financial power of the United States had been consolidated in a powerful fist.

Recognizing the inevitability of war and the United States' participation in it, the financial community of the country (together with other interested parties) in 1913 created the Federal Reserve System — the most powerful financial structure of the world since then and until now. This helped them win the First World War, together with the allied states. This allowed them to realize the industrialization of the Soviet Union — their  future  ally. This allowed them to single-handedly win the Second World War and become the largest financial, economic, scientific and political force in the world. It is this world power that is now the guarantor of our state's existence and the source of our hope.

So, high bank interest on deposits is evidence of criminal helplessness in the building of the state. High inflation interferes with the normal development of the Ukrainian banking sector, without which further economic development is impossible.

We have only one way out to build a national Ukrainian state, where to high state positions will be appointed people in order to serve the interests of the nation and not their own profits at the expense of the nation. From the financial “scam” Ukraine has to turn into a construction site of the modern Ukrainian nation.

Ending an unprecedented export of currency abroad will by several times reduce the constant enormous pressure on the national currency, will help stabilize its exchange rate and will become a financial basis for the modernization of the country. This task is just as important and necessary as the development of the Ukrainian Army in today's cynical Russian-Ukrainian war.