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. Last Updated: 07/27/2016

EDITORIAL: Silver Bullet Ruble Fix Not Viable




Everyone from Hungarian-born financier George Soros to former Argentinian Finance Minister Domingo Cavallo to Russia's own Boris Fyodorov has been urging Russia to adopt a harsh new monetarist system, called a currency board, to save the ruble.


Yet a currency board is no magical thing. It is basically just an easily verified promise not to print a lot of rubles. Usually the Central Bank prints (or does not print) rubles as it sees fit; under a currency board, the Central Bank would instead promise to honor a mathematical formula requiring every ruble in circulation to be backed up by a certain amount of hard currency in its reserves.


The next prime minister will surely be tempted to print rubles, so that workers can be paid and banks bailed out with easy loans. Protests that this will cause inflation will grow less fashionable as the crisis bites deeper.


Enter the currency board, the new target for all public anger. The logic behind it is mostly political: Rather then take the heat for courageously refusing to print rubles and firmly turning away all those supplicants -- from the miners and teachers to campaign finance sources like Gazprom or Uneximbank -- the government will be able to shrug and cite the board's inflexible math.


There are other specific political attractions for the government in a currency board. For one, it must sound reassuring to those raised as apparatchiki -- what better way to save the ruble than to set up a committee? The simplicity of putting faith in a single mathematical formula must also feel comforting, as it smacks of the pseudo-scientific mysticism that informed so much of Marxist-Leninism.


Another attraction is that establishing a currency board, which sounds very practical and macho, might provide a new lever with which to pry billions more out of the West. Fyodorov says the Central Bank, which has reserves today of $13 billion, already has enough to satisfy the currency board's math. But other economists say Russia would need more like $25 billion. Suddenly, announcing a currency board looks like a great way to lure the IMF, the World Bank and the White House into another $15 billion to $20 billion commitment.


Russia's problem is not that it can't figure out how to be sadistically monetarist. This is one of the few things it has learned to do well -- choking off the ruble supply and the inflation of the early 1990s, and as a side-effect fostering a deflationary wage arrears crisis. The problem is that it can't decide whether to listen to radical free-market monetarists and to do the same thing all over again.