THE VIEW FROM VEDOMOSTI: Great in Theory, 'Euroruble' Would be Political

Tough Sell

The Bank of New York scandal has created a kind of financial Russophobia: The Republic National Bank is closing the correspondent accounts of Russian banks, Barclays is checking the accounts of Russian companies for suspicious transactions and I have even heard people complain about their Russian credit cards being rejected by Western stores.

Capital flight from Russia continues unabated at the rate of about $1 billion per month, Russian officials say. Obviously, it was not enough to expose Benex, Becs and Torfinex as flight channels.

They were just the tip of the iceberg. But Russian money is, at least ostensibly, not welcome in respectable Western nations anymore.

That means, theoretically, that Western societies should be interested in a tight cordon sanitaire, to use an idea Prime Minister Vladimir Putin has advocated for use in Chechnya, a barrier that would keep Russian money at home.

They say administrative controls do not work in a global economy. That is not quite true: In fact, Russia was able to keep a lot of Western money from leaving the country by using a Putin-style cordon sanitaire after August 1998.

Now, CS First Boston, which had always stuck to the role of a portfolio investor, is seriously considering a plan to invest $100 million in silicon production near Krasnoyarsk, Western Siberia.

The 1998 default was, of course, unfair to Western investors - but without it, the Zheleznogorsk Chemical Metalurgy Factory could never have hoped for such a windfall. Someday soon, with CS First Boston's help, it may become a big exporter of silicon to Asian semiconductor factories.

Unlike CS First Boston's investment in now-infamous Russian government bonds, Russian capital is not frozen.

Moreover, it is not as easy to locate and freeze. In recognition of this, a former Russian director of the European Bank for Reconstruction and Development who now runs an investment company in Britain has come up with a smart plan.

Oleg Prexin, managing director of Euroinvest, a company set up by the Cambridge Research and Advisory Group, has helped devise a scheme code-named Euroruble. It has international lenders, like the World Bank, the International Monetary Fund and the EBRD, guaranteeing a special bond issue jointly with the Russian government. Obviously, the Western guarantees would be somewhat more attractive to retail investors, to whom the Euroruble bonds would be offered.

State Duma Deputy Alexander Shokhin, who has served in several previous governments, is a strong proponent of the plan. He has even negotiated with the EBRD on the bank's participation.

The fun of it is not just that the scheme would help flush out the $40 billion that Russians supposedly keep under their mattresses - which they do not: That money has long since fled to the Caymans. For the first time, the Euroruble plan offers international financial institutions a share of responsibility for Russia.

So far, they have just given money - they have not done much to make sure it was not misspent.

The new plan tells them: Put your money in a specific project that just might create an investor class in Russia and keep Russian money away from the likes of Benex as an added benefit.

I cannot see Michel Camdessus jumping at the chance to invest in Euroruble. The IMF, like other institutional lenders, is a bureaucratic organization that is more likely to reject fresh ideas than to accept them. Yet the beauty of the plan is undeniable. It is economics at its best: Empower the small investor and you kill a multitude of birds with one stone.

Capital flight will slow down. Russia will get a large, reliable bond market, which will benefit not just the banks and investment companies, but also many of the people who have lost faith in modern financial instruments since the August crash. There will be no more doubts about how international organization lending is used.

Life, unfortunately, is much too politicized for this to happen. Bureaucrats everywhere are more interested in controlling money flows, no matter how inefficiently, than in creating conditions for money to do good.

The Euroruble plan, unfortunately, is likely to take an honorary place on the shelf next to Grigory Yavlinsky's hopeful and well-meaning 500 Days economic recovery program, drafted back in 1990.

Leonid Bershidsky is the editor of Vedomosti.