Monetary Sovereignty, Sanctions and Russian Economic Policy

The central role of economic sanctions in the US/EU strategy against Russia has returned international political economy to center stage, if it had ever left it.  Here are some thoughts occasioned by Adam Tooze’s interesting analysis of Modern Monetary Theory (MMT) as perceived by the Russian economic policy apparatus, connected to the role of monetary reform in the anti-colonial struggle of the 1930s as documented by Eric Helleiner in Forgotten Foundations of Bretton Woods.

Let’s start with MMT.  This is usually presented as a set of claims and recommendations that follow from acknowledging the implications of monetary sovereignty: countries whose central banks issue internationally accepted (hard) currencies and can therefore borrow without foreign exchange constraints can treat debt like money, running fiscal deficits as needed to sustain full employment indefinitely.  Rather than being raised to “pay for” spending, tax revenues should be adjusted so that debt is as stimulative as it needs to be, short of provoking inflation.  This is, for the most part, a resurrection of first-generation (1930s) Keynesian thinking, as codified, for example, in Abba Lerner’s Functional Finance.

In the usual presentation in a US or other wealthy country context, MMT takes monetary sovereignty as paradigmatic: it is assumed to exist as the starting point for the rest of the analysis.  Moreover, such sovereignty is implicitly treated as binary; it exists or it doesn’t.  Thus there are two types of states, those to which MMT applies and all the rest.

But there’s a different way to look at the question.  Sovereignty or its lack, rather than being a parameter, can be thought of as an object of policy, something to be achieved.  And rather than being all or nothing, sovereignty can be a matter of degree, a policy space that can expand or shrink depending on the circumstances countries face and the measures they take to respond to them.  Finally, sovereignty in economic matters is a crucial component of sovereignty overall.

This is clearly how things look from a Russian government perspective.  Emerging from the Yeltsin period in the 1990s, Russia was a largely extractive state that created fortunes for those able to seize former state assets, especially in natural resources, but little was done to institutionalize an economy capable of growth, development or effective policy guidance.  The country lived, as it still largely does, on revenues from energy and other resource exports, and modest growth occurred as the result of reinvestment by entities acquiring those export revenues.  The disaster of 1998, when Russia experienced a sudden stop in capital inflows, led to a regime of budget surpluses—i.e. fiscal austerity.

But Russia hoarded its current account surpluses, building up a war chest of hard currency assets in its central bank and using capital controls to restrict the ability of private actors to spirit capital abroad.  What some Russian analysts came to realize was that this conferred a substantial degree of monetary sovereignty on the country, making it eligible for the growth-friendly recommendations of MMT, or Keynesian fiscal policy in general.  This is documented by Tooze.  What he doesn’t say, but what lies at the heart of the story, is Russia’s ability to continue to earn reserve currencies, euros directly and dollars indirectly, by its energy exports; this defines a space in which the ruble can indeed be sovereign, since it is exchangeable for these other currencies up to the limit of those revenues.  That’s not full sovereignty in the “pure” MMT sense, but it’s enough to justify an expansive countercyclical fiscal policy.  It also bolsters Russia’s overall sovereignty, including its ability to execute the war against Ukraine.

Sovereignty is not always a good thing.

All of this brought to mind the fascinating narrative that takes up most of Helleiner’s superb book on international monetary policy pre- and post-WWII.  I understand that Helleiner had to structure his book around a central thread, and he chose to have it argue against the claim that “development” was a neocolonial concept foisted on the global South in the context of the cold war between the US and the USSR.  On the contrary, he shows that development was the goal of Latin American governments democratizing in response to the Great Depression, along with the Indian independence advocates seeking economic as well as political sovereignty vis-a-vis England.

The largest part of his book, however, is taken up with an account of monetary reform in Latin America during the 1930s, which was both an economic and a political movement.  Prior to the depression, these countries had either adhered to the gold standard or were making do as debtors powerless in the face of the global power exercised by Wall Street, the City of London, and the political-military apparatus that enforced their dictates.  They had no meaningful sovereignty in economic affairs, and public projects to promote development were largely ruled out by monetary constraints.

Then the New Deal swept into power in the US, and in large parts of the governing apparatus there was open hostility to Wall Street.  In particular, a team in the Treasury Department, headed by Harry Dexter White, took as its mission monetary reform throughout the Americas that would increase sovereign policy space, especially for expansionary fiscal policy.  They helped countries develop the tools to conduct independent monetary policy, creating central banks with foreign exchange reserves and as much flexibility in money creation as circumstances would permit.  While Helleiner foregrounded the widespread desire for development and the centrality of the South’s demand for it in the Bretton Woods process during the subsequent decade—a decision I understand—it now seems to me that there is another thread of equal importance: the role of what we now call Keynesian macropolicy and institutional capacity in decentering the global power of finance.  That is, Keynesianism in the achievement and exercise of monetary sovereignty works against the subaltern status of non-dominant countries.

To take one example from the present, the case for sanctions against Russia we initially heard was that, while they might not be so effective in the short run, they would be devastating over time as restrictions on international investment take hold.  But this assumes that Russia would be unable to make those investments on its own.  This is false to the extent that Russia has the means and will to run deficits to finance them.  (I am abstracting from the parallel issue of technology transfer and integration.)  Until recently the will was missing, since, as Tooze documents, the Russian state ran surpluses to prevent any recurrence of 1998.  What the MMT debate inside the country signifies is that at least some Russian policy experts understand that a current account surplus does indeed confer the ability to self-finance growth.

The freezing of central bank assets is significant, but only in relation to Russia’s demand for foreign exchange.  As long as it has enough oil and gas revenue to not only finance sufficient consumer imports but also sustain the sovereignty that fiscal deficits requre, it can continue on its present path.  In the end there is no substitute for radically shrinking those revenues.