Fiscal Responsibility Or Hands Off?

In summer of 1989, Romanian dictator Nicolae CeauÅŸescu repaid Romania’s debt in full, and early. The ostensible reason was to make the country financially independent and free from the “economic imperiaism” of the West. At least part of the real reason was to give him a free hand to do as he wished domestically without outside pressure. It would also eliminate any leverage the West had over his economy and help ensure his regime’s survival. I was reminded of this, which Kaplan discussed in Balkan Ghosts, when I saw this:

Russia to repay $15bn debt early

Russia has struck a deal for early repayment of $15bn (£8bn) of debt owed to the West since Soviet times. The money is owed to members of the Paris Club, a grouping of 19 rich lending nations. The move will help Moscow save $6bn in interest payments that would otherwise have been due by the year 2020.

The payment, which is due to be completed by August, comes four months after Moscow repaid its debts to the International Monetary fund. In total, Russia owes the Paris Club $44bn (£24bn). This deal – the biggest debt redemption in the institution’s history – will cut that figure by about a third. Paris Club members include the UK, France, Germany, Japan, Russia and the US.

While there was a great deal of fuss made over the not-so-subtle takeoever of Yukos, keeeping Russia’s vast natural resources firmly under state control isn’t all that hard to understand from a Russian perspective. Russia’s biggest weapon today is its natural resources and mountains of cash from high oil prices. If it wants to reassert itself in geopolitics as a major player, Russia will need to control its own financial destiny.

About Chirol

Sir Ignatius Valentine Chirol (1852 - 1929) was a journalist, prolific author, world historian, and British diplomat. He began his career as a foreign correspondent and later became editor of the London Times. After two decades as a journalist he joined Her Majesty's Foreign Ministry as a diplomat and was subsequently knighted for his distinguished service as a foreign affairs advisor. Additionally, he wrote a dozen books on foreign affairs including The Far Eastern Question (1896), Serbia and the Serbs (1914), The End of the Ottoman Empire (1920) and The Egyptian Problem (1921). He is generally credited with popularizing "Middle East" in reference to the Arabian Peninsula with his book The Middle Eastern Question (1903). "Chirol" is a US citizen and graduate student studying Defense and Strategic Studies and government contractor. As with the historical Chirol, he has traveled to over two dozen countries and lived abroad for many years. Chirol speaks English and German fluently with basic knowledge of manyl of others.
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14 Responses to Fiscal Responsibility Or Hands Off?

  1. IJ says:

    _Russia’s biggest weapon today is its natural resources and mountains of cash from high oil prices. If it wants to reassert itself in geopolitics as a major player, Russia will need to control its own financial destiny._

    Playing by whose rules?

    “Leading neo-conservative ideologue Robert Kagan wrote a prominent opinion article recently in the Washington Post. . . Kagan declared, in reference to Russia and China, “Until now the liberal West’s strategy has been to try to integrate these two powers into the international liberal order, to tame them and make them safe for liberalism. If, instead, China and Russia are going to be sturdy pillars of autocracy over the coming decades, enduring and perhaps even prospering, then they cannot be expected to embrace the West’s vision of humanity’s inexorable evolution toward democracy and the end of autocratic rule.”

    “Kagan charged that China and Russia have emerged as the protectors of “an informal league of dictators” that, according to Kagan, currently includes the leaders of Belarus, Uzbekistan, Myanmar, Zimbabwe, Sudan, Venezuela, Iran and Angola, among others around the world, who, like the leaders of Russia and China themselves, resist any efforts by the West to interfere in their domestic affairs, either through sanctions or other means.” “US outflanked in Eurasia energy politics”:http://www.atimes.com/atimes/Global_Economy/HF10Dj01.html

  2. LazyNomad says:

    I suppose that Russia decided to repay part of it`s debt earlier mainly due to the financial reasons. Huge income of currency from oil export can lead to so called ‘Dutch disease” – stagnating of non-energy sector and high inflation. So that generating some outcome of capital seems like a good option for Russia`s economy.
    Current western criticism of Russia`s policy has little to do with remained debts.

  3. Dan Nexon says:

    LN: could you elaborate on how paying down the debt will help Russia avoid becoming — or becoming more of — a rentier state?

    Chirol: “If it wants to reassert itself in geopolitics as a major player, Russia will need to control its own financial destiny.”

    The irony just drips here, doesn’t it?

  4. LazyNomad says:

    Dan: At the moment Russia doesn`t have clear understanding of what to do with the excess of currency. It`s central bank`s foreign reserves reached 247 bln USD (as of June, 2) plus over 62 bln USD in Stabilizing Fund. Ruble gets stronger while non-energy production slows. Every russian economist understands the needs to diversify economy to manage this wealth, though no clear plan on how to do it has been made so far. The idea to repay the debts earlier is what the governmental economists has come up with to ease the pressure on dollar-ruble rate, but it seems inadequate and temporal decision.

  5. Curzon says:

    Paying off debt making one free and independent? _Puh-leeze._ Nicolae would have done better to spend the money on something worthwhile rather than pay off the debt. Need I remind you that Nicolae and his wife were murdered on Christmas Day, 1989.

    Debt is _waaaayy_ overrated as a bad thing. Debt is good, loans are good, it allows for investment, growth, and much more. And as I’ve written before, “America’s enormous debt and foreign ownership of that debt is a good thing.”:http://www.cominganarchy.com/2005/03/09/why-do-foreigners-buy-us-debt/

  6. adamu says:

    It’s “hands-off,” sir. I would like to remind all readers and authors never to try and form a plural with “apostrophe ess.” Thank you, that is all.

  7. Chirol says:

    Curzon: Don’t take free and indepedent too literally. According to Barnett:

    The Romanian dictator had witnessed Warsaw’s near default on its large foreign debt. Poland’s subsequent economic collapse convinced Ceausescu that his regime had to avoid this scenario at all costs.

    Three elements drove him to this drastic conclusion:
    First, a debt crisis would force the self-proclaimed “Genius of the Carpathians” to admit his economic mismanagement.

    Second, such a crisis would cause Ceausescu’s regime to lose credibility with the already hard-pressed workers. The ever-vigilant dictator could not allow a Romanian version of Solidarity to develop.

    Finally, Ceausescu abhorred the idea of Western financial institutions gaining leverage over Romania’s economy. The despot had spent years reducing Moscow’s influence, and was not about to have it replaced by Western meddling.

    Adamu: Noted. I don’t even know why I put one in. I tend to throw them in for no reason without thinking, even if I know they’re wrong normally.

  8. Joe says:

    Saying “debt is good” is just as wrong as saying “debt is bad.” The fact is that there’s good debt. If you borrow $150k to get a Harvard degree and then use that name to get a job upon graduation that pays $150k or more a year, you’ve done damn well investment-wise. On the other hand, borrowing $150k to get a degree from a no-name university would likely leave you in the hole farther than you can dig yourself out.

    Likewise with government debt. It’s a question of what effect the loan has outside of changing the composition of the balance sheets. Conditions, pressure and all that can have negative effects that outweigh the positive effects of having more funds on hand. A leader could be justified in saying “Let’s go our own way,” just as a graduate could be justified in saying “I don’t want to make monthly payments until I’m 50.”

    (Side note: My management professor in college once said “There are only three things you should ever buy with debt: vehicles, real estate and degrees.” Which, I think, is a good rule to live by, assuming you’re too lazy to do math.)

  9. Elizabeth says:

    I hope that’s not an exclusive “or”.

    It is possible for countries to want to be both prosperous, and self-determining.

  10. alec says:

    Ownership of American debt abroad would be good if say, other countries were allowed to use their American currency to actually purchase anything in America. Some of the primary owners of our debt, such as China, have been prevented from making purchases in America ( http://www.sfgate.com/cgi-bin/article.cgi?file=/chronicle/archive/2005/06/23/CHEVRON.TMP ). This can also be reiterated in the Dubai port deal that was essentially made into a political issue due to ignorance and xenophobia.

    Some other things: I don’t think Ceausescu’s removal should be attributed to economic mismanagement. Yes, the stagnation of 80′s led to a loss of popularity with the people, but the falling out experienced within the military was the primary cause of his removal from power and subsequent execution.

    LazyNomad: you raise a very good point, which is the energy market has flushed the Russian treasury reserves with foreign currency. There is no better time than now to pay off debt (especially if the oil market drops off in the near future).

    Also Joe, to reiterate your management professors points, the one thing my first economics professor said in the first day of class was ‘never, ever lease a car’.

  11. Zorobabel says:

    $15 billion is less than peanuts for Russia today. Paying off debt to large creditors like the Paris Club and the IMF is far different than, for example, the diversified (and crippling) debt of the Japanese central government. In the former’s case it is better to pay it off as quickly as possible. This is why you consistently see countries doing it, from Indonesia and Argentina to Russia now.

    This also brings up an interesting point, which is that Russia’s forex reserves will surpass Taiwan’s by the end of the year and put it in 3rd place after Japan and China. The central government is running a huge budget surplus. With oil prices around $70, the budget and trade surpluses will be substantial. If the government can properly invest the money and maintain 6% growth for a decade the country will be worthy of being called a developed nation.

  12. LazyNomad says:

    Russia need`s 6% growth for 3 more decades at least to be worthy of being called a developed nation.

  13. IJ says:

    It is better to have access to oil and gas, than be thought a ‘developed’ nation. Will “OPIC”:http://www.cominganarchy.com/2006/07/02/acronym-of-the-day-opic/ be able to persuade the world that the free market in energy is the way forward. On the basis of past events, this won’t be easy.

    _The contradictions in the various stances became [.] apparent: within the EU there is little “free market” in energy; Russia resists EU and US calls to open up access to its Soviet-era pipeline systems; and the US has no moral right to interfere and preach transparency and commercial practices to prevail in the energy market when it just recently showed no qualms in discouraging the China National Offshore Oil Corp (CNOOC) from making even a modest bid to acquire stakes in the US energy company Unocal. The net result is that hopes have receded that the G8 summit would be a landmark event on matters involving energy security._ “The G8 summit – A chronicle of wasted time”:http://www.atimes.com/atimes/Global_Economy/HG06Dj01.html

  14. Elizabeth says:

    Lazy Nomad: It depends if by “developed” you mean “richer than most others” or “with strong social services, rule of law, and good human development indicators”. I would suggest it’s the latter, which will be harder to achieve but may be achieved even if there are temporary downturns in growth.

    IJ- hear hear.