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. Last Updated: 07/27/2016

Bold Approaches to Aid

Russia cannot have meaningful trade or investment relations with the rest of the world until it has a sound, convertible currency. It should be apparent that the ruble cannot be salvaged; a discredited money issued by a discredited regime, the ruble should be left to self-destruct in a final paroxysm of hyperinflation.


In its place, a new currency should be established. Here is where the support of the Group of Seven industrialized nations, prompted by the U. S. president, could make all the difference in determining Russia's future. With Western backing, Yeltsin could announce the creation of a new Russian Currency Bank. It would be charged with producing a new sound convertible Russian currency to displace the ruble.


Unlike Russia's existing Central Bank, which churns out rubles to meet the tyrannical demands of congressional-hardliners seeking to placate the bosses who still control Russia's vast industrial sector, the new Russian Currency Bank would be permitted to issue money only in amounts equal to its hard-currency reserves. Any foreign investor who wished to do business in Russia would first convert his dollars, Deutsche marks, or other hard currency into units of the new Russian currency. The new Russian money, by definition, would be convertible into Western currencies on demand.


Initial reserves to back the new Russian money should come from G-7 central banks that hold collateral from former Soviet loans, from Western commercial banks (mostly German) that made government-insured loans to the Soviet Union and from a sizable contribution in gold or diamonds from the Russian government. Additional units of the new Russian money would be created as Western investors deposited hard currency funds to finance their activities in Russia.


The new Russian currency would serve as the monetary base for the domestic economy, providing the solid reserves for a network of private banks that would spur new lending for small-business endeavors.


Such a solid monetary foundation is a prerequisite for the development of a free-market economy. Ordinary Russians have felt entirely left out of the transition to capitalism except for the indignity of being victimized by the inflating ruble. Only fools would bother to save their money or attempt to build up sufficient capital to start a business -- and you can't have capitalism without capital.


That is why Western cooperation to set up a Russian Currency Bank is Yeltsin's last hope for political victory and Russia's last chance for economic salvation. By introducing a new sound currency, Yeltsin will be able to assure citizens that he can eclipse the power of Russia's Communist-dominated Congress over the Central Bank and the ruble printing presses.


At the same time, the support of the G-7 in setting up the currency bank will provide a powerful signal that the West is financially engaged with Russia and ready to do serious business.


The International Monetary Fund should not be part of this initiative. Bureaucrats at the IMF have shown no aptitude for creative solutions to Russia's compelling circumstances. Last year's $24 billion "package" was an amalgam of wrong solutions that emphasized big government transfers over small business incentives, and demonstrated more faith in state mechanisms than in the profit motive of individuals. Some $11 billion in short-term government credits was received by Russia to pay for Western imports; more than $3 billion has already come due (Russian taxpayers will pay if Russia defaults).


What was the impact of this "aid? " Since Western goods are extremely popular, Russian manufacturers were discouraged from trying to compete with domestically produced consumer goods. Besides, imports can be sold for any price while the retail markup on Russian-produced goods in restricted to 25 percent.


More than $7 billion of the IMF package represented a deferral of Russian payment on debt to Western creditors. Given that the $85 billion total outstanding debt was contracted almost entirely by the former Soviet Union, one can understand why Russian democratic reformers (who spoke out against Western lending that buoyed up central government authority) are less than grateful.


Finally, the IMF was charged with providing a $6 billion ruble stabilization fund. Russia would receive the funds as soon as it balanced its budget and rigidly controlled the supply of rubles. Surprise! Russia never came close to complying with either requirement. So much for IMF oversight.


The focus of Western financial cooperation should be, rather, the Bank for International Settlements in Basel, Switzerland.


It's time for the West to display bold initiative. It's time to exercise leadership. Yeltsin is in trouble. We must rally to his side in a way that is consistent with our belief in grass-roots capitalism.


We cannot take on responsibility for Russia's social safety net; there's not enough money in the West to pay for that. But we can give Yeltsin the ultimate tool -- a sound convertible currency -- for moving toward the dream of a free market economy. and we can only hope that in the process the Russian people will come to embrace capitalism, not merely for its efficiency, but for its fundamental morality.


Judy Shelton is a senior research fellow at the Hoover Institution at Stanford University, and the author of "The Coming Soviet Crash". This article was written for Newsday.