Accommodative monetary policy, fiscal stimulus and foreign exchange reserves within the framework of Russian national economic interests: Long-standing problems and new challenges

Abstract

Ultra-accommodative monetary policy, fiscal stimulus, and, as a result, growing debt were the main features of advanced economies development in the 2010s. The pandemic crises of 2020 intensified those trends. Russian authorities had to respond to the new challenges inspired by the global economic slowdown and massive lockdowns thru adopting relaxing monetary conditions and employing fiscal impetus. However, “the new financial reality” of zero-negative interest rates and fast-growing public debt in major advanced economies highlighted the long-standing problems of international financial architecture as well as created new challenges for the Russian national economy. In the article, the author analyzes monetary, fiscal and debt risks challenging the world economy during the last decade and concludes that under current circumstances continuing accumulation of foreign exchange reserves is resulting in growing dependence of Russia economy on the monetary policy of the world’s leading central banks, creating devaluation pressures on the ruble and, consequently, increasing outside inflationary impact on the domestic economy. Ultimately financing the already inflated budget deficits of the United States, the Eurozone and Japan and thereby feeding the wave of “debt tsunami” that is looming from these economies, the Russian Federation is losing investment resources that are so vital for sustainable economic growth recovery. The main goal of the article is to prove that within the framework of the new global financial reality, the further accumulation of foreign exchange reserves preserves ruble undervaluation and ultimately undermines the sustainable development and economic growth of the Russian economy. The author suggests the key elements for national economic policy aimed to support the domestic economy may and should be ruble appreciation. The adjusted paradigm of Russian economic development based on the import substitution model is a strong argument in favor of this proposal.