By Renfrey Clarke
MOSCOW — The remaining confidence of many Russians in the economic strategies of their government perished over the weekend of July 24- 25, as a shock monetary reform threw retail trade into chaos and threatened to confiscate large sums from the population.
Out of 19 types and denominations of banknote circulating in Russia, 12 were declared by a Central Bank edict to be no longer legal tender. Citizens were given two weeks to exchange these notes, printed before 1993, for others of more recent issue. The total sum that could be exchanged was limited to 35,000 roubles — roughly the average monthly wage.
If people had just sold a car for cash, or had scraped together several months' wages to pay for housing repairs, that was too bad. They were invited to place their excess pre-1993 roubles in special savings bank accounts which would be frozen for six months, and which would pay interest at roughly one-seventh of the 15-20% monthly inflation rate.
Even people who had only a few thousand roubles in old notes were forced to queue for hours at the banks — if, that is, the banks themselves had 1993 banknotes to exchange.
The reform left Russia almost totally without small change, as the lower-denomination banknotes were no longer valid. Buying a newspaper or a loaf of bread became impossible, unless you were prepared to pay with a 100-rouble note, the smallest issued in 1993.
Not surprisingly, the Central Bank's move aroused near universal resentment. Sensing the political cost of the reform, leading state figures did their utmost to dissociate themselves from it. Finance minister Boris Fyodorov, who at the time of the announcement was in Washington, claimed that he had not known of the plans, and attacked the measure as the outcome of "Bolshevik methods of a Stalinist socialist nature".
Parliamentary speaker Ruslan Khasbulatov attacked the reform as "confiscatory" and "a direct violation of human rights". Boris Yeltsin's deputy chief of staff, Vyacheslav Volkov, called on the president to annul the move. Apart from officials of the Central Bank, only Prime Minister Viktor Chernomyrdin publicly supported the reform.
Yeltsin returned hurriedly from vacation to confront the crisis. On July 26 he issued a decree which drastically softened the reform's provisions. The maximum that could be exchanged was raised to 100,000 roubles, and 10,000-rouble notes issued in 1992 were allowed to be exchanged in any quantity. Instead of two weeks, citizens now had until the end of August. The smallest-denomination bills once again became legal tender.
Significantly, Yeltsin did not denounce the Central Bank's actions, and presidential chief of staff Sergei Filatov stated that "in general", the president had approved the rouble withdrawal.
Meanwhile, the Russian public set to work devising ways to get around the provisions. Countless stalls and kiosks continued to accept "old" roubles, at a premium of 30 to 50%. Pavement money-changers conducted a lively trade, speculating on the now distinct values of 1993 and pre-1993 banknotes. Russians planned shopping sprees in other countries of the former Soviet Union where the "old" rouble remains valid. For a consideration, pensioners stood in line at the banks, changing the "old" roubles of more prosperous neighbours.
Political analysts set out to try to explain how this scheme — ill conceived, poorly executed and doomed to be largely ineffective — could ever have been given the go-ahead.
Although senior Yeltsin officials claim not to have known that the monetary reform was to take place, trying to solve the problem of inflation through expropriating much of the purchasing power of the population has had a considerable vogue among Russian economists. The supreme example of such a move has been the near-complete wiping out of savings bank deposits that occurred as a result of Yeltsin's price liberalisation in January 1992.
The idea of declaring various banknotes invalid, and of limiting the sums that people could exchange in the banks, was tried under Gorbachev in February 1991. The results were mediocre, and the move added to Gorbachev's unpopularity.
Nevertheless, the idea of using another such reform to attack inflation remained attractive to neo-liberals, whose ability to formulate an integrated anti-inflation policy has been crippled by their doctrinaire rejection of price controls. In a speech on July 27, Central Bank chairperson Viktor Gerashchenko indicated that a monetary reform similar to the latest one had originally been planned for April, but had been postponed for technical reasons.
The idea of conducting a shock monetary reform also appealed to neo-liberals as a convenient, if crude, means of breaking up the so-called rouble zone at minimal cost to Russia.
After the collapse of the USSR, national leaders in the former Soviet republics were urged to continue using the rouble as a common currency. Now, the International Monetary Fund wants the rouble zone dismantled, arguing that the effect of the uncoordinated issuing of rouble credits by the central banks of numerous countries is destabilising and inflationary. A major fear of the Russian authorities, however, has been that ending the rouble zone will result in large quantities of roubles flowing back into Russia.
On July 12 the Russian Central Bank signalled an abrupt stiffening of the conditions for membership of the rouble zone when it sent a cable to the other nine member governments making clear that Russia would provide new roubles only to countries that agreed to strict money and credit controls. The responses were reportedly unsatisfactory.
The plans gained new urgency on July 22 when the Russian parliament, as part of its continuing battle with Yeltsin, adopted a 1993 budget with a projected deficit at the alarming level of 25% of GDP. To pro-Yeltsin economic strategists, the need for decisive anti-inflation measures must have seemed especially pressing.
The lesser countries of the rouble zone have felt the most damaging effects of the reform. The English-language Moscow Times reported on July 27 that "up to 80% of the value of Georgia's money supply vanished over the weekend". Georgia, Belarus, Moldova and Azerbaijan now reportedly intend to speed up plans to introduce their own monetary units.
The main "achievement" of the reform, it now seems, will be hastening the end of the rouble zone. The effects of the move on Russia's inflation rate will be minor at best, and perhaps even counter-productive. Under the new terms decreed by Yeltsin on July 26, few Russian citizens will be unable to exchange their old banknotes for new, and the gain to savings bank deposits will be negligible.
The flows of currency that will result from the reform are unpredictable, but potentially damaging. Russian citizens will be encouraged to export "old" roubles to buy up goods in other rouble-zone countries. But people from these countries will have a strong inducement during August to ship large quantities of devalued pre-1993 banknotes into Russia. The flood of roubles so feared by the Russian authorities could happen anyway.
The most enduring consequences will almost certainly be the political ones. Russians have once again been forced to stand for hours in queues, as misplaced penance for official incompetence. When deciding who to blame, few people will make a distinction between the Central Bank and the government.
As the Moscow daily Nezavisimaya Gazeta suggested on July 27, the vote of confidence which Yeltsin won for his economic policies in the April referendum is now as devalued as an "old" rouble.