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by Lynda L. Maillet
(East/West Letter, September/October 1994, vol. 3, no. 5, 1994)
Amidst the finger pointing and political gesturing, the Russian ruble has stabilized somewhat since 11 October -- "Black Tuesday" -- when the ruble lost almost 25% of its value in one day. The ruble closed at 3,926 to the dollar, its lowest value ever. Only two days later, it recovered, climbing 20% to 2,994 to the dollar. However, the political backlash will linger long after the one-day ruble shock. The causes behind the crisis are also of far more concern than the event itself.
Typically, one of the central triggers to the crisis emerged from politicking in the bureaucracy. The relatively tight fiscal and monetary policies which had successfully brought inflation down to moderate levels were relaxed over the summer when government ministers caved in to pleas for handouts from agricultural and industrial producers. The Central Bank issued credits amounting to an estimated 7 trillion rubles in July and August alone. This has and will continue to push up inflation, which had fallen to 4% per month in August and has since increased to 10% in October. The inflation sparked by these credits prompted the Central Bank to allow the ruble to adjust by dropping in value from 2,000 to the dollar earlier in the summer to nearly 3,000 to the dollar at the beginning of October. A weaker ruble would mean it would take fewer dollars to pay for the budget deficit caused by the increased credits and to pay delayed salaries. It would also serve to protect domestic industry by making imports more expensive.
In September, the Central Bank announced that it would stay out of the currency market in order to preserve its foreign exchange reserves. The scale of previous intervention was revealed on 27 September, when the Bank announced that reserves had fallen below $5 billion after $2.5 billion had been spent in the preceding two months. The Central Bank's unwillingness to intervene led to widespread doubt of the government's commitment to defend the ruble, boosting demand for dollars even further. On Black Tuesday, the Bank intervened only a little, and rather late, in order to halt the ruble from dropping below 4,000 to the dollar. The recovery two days later was partially due to renewed Central Bank intervention. The Bank also raised short-term interest rates to 170% from 130% to help curb currency market speculation.
Another factor in the ruble's drop was a recent Central Bank regulation barring foreign companies from withdrawing hard currency from Russian banks (for salary payments and other purposes). Beginning in September, foreign companies can withdraw hard currency from Russian banks only with evidence that it is needed for a business trip abroad. The result of this measure has been to push Russian and foreign employees of foreign companies -- formerly paid in hard currency -- to dump their ruble salaries on the currency market in exchange for more stable dollars. The Bank's measure was meant to reduce the role of cash dollars in Russia's economy. It instead had the opposite effect, decreasing confidence in the ruble and increasing demand for the dollar.
In another move decreasing the demand for rubles, immediately following Black Tuesday the Central Bank started requiring one day advance ruble payments for dollar purchases on the Moscow Interbank Currency Exchange. This move is meant to discourage troubled domestic banks from making instant dollar profits by delaying ruble payments for dollar purchases.
These economic factors, arising from political motives and pressures, all most likely contributed to the fall of the ruble on Black Tuesday -- what we'll call the "political economy theory." This has not prevented the Russian politicians from seeking to place blame and find scapegoats.
Political Fallout
President Boris Yeltsin's reaction to the crisis was to fire those he saw responsible -- acting finance minister Sergei Dubinin and chairman of the Central Bank Viktor Gerashchenko. Mr. Dubinin had little responsibility for the drop in the ruble and was certainly only a scapegoat. Mr. Gerashchenko, on the other hand, was a powerful conservative figure who most likely would have survived a parliamentary vote to oust him. Mr. Yeltsin felt that the two, especially Mr. Gerashchenko, did not do enough to prop up the ruble by using Central Bank resources to buy rubles on the currency exchange. Alternatively, Mr. Gerashchenko, after issuing enormous credits over the summer, may have tried to devalue the government's budget deficit in an extremely suspect way by refusing to prop up the ruble. In any case, the government appeared to be at a loss for appropriate responses to the crisis. This gives rise to an "incompetence theory," encompassing both Mr. Yeltsin and Mr. Gerashchenko, who, for all their posturing, probably do not know enough about the proper regulation of currency markets to place any blame for the ruble's fall.
Other Russian politicians were convinced that the ruble's drop was caused by a conspiracy of special interest groups -- what we'll call the "conspiracy theory." Parliamentarians believed that the crisis was engineered by, alternatively, the banks, the government, oil exporters, or Western spies. These beliefs hearken back to the old Soviet days when disasters of one sort or another were inevitably blamed on the enemy. Mr. Yeltsin also seemed to subscribe to this theory and even organized a committee comprised of his National Security Council and the secret police to investigate the incident. He and others believed that conservative ministers conspired to discredit the reform process.
In the meantime, Mr. Yeltsin named Tatiana Paramonova as acting chairman of the central bank and Andrei Vavilov, a 33-year-old deputy finance minister, as acting finance minister. Both positions are deemed temporary while political struggles continue over who should take the positions permanently. However, both appointments demonstrate Mr. Yeltsin's commitment to reform. Ms. Paramonova, in particular, is known for being frugal in issuing credits and tough on inflation.
On 28 October, Prime Minister Viktor Chernomyrdin narrowly survived a parliamentary vote of no confidence in his government, which was also a not-so-veiled attack on Mr. Yeltsin. The close call illustrates the rising opposition to Mr. Yeltsin and his policies and the precarious position of Mr. Chernomyrdin, whose days may be numbered despite his remarkable resilience.
IMF as Savior
The government is trying to negotiate with the IMF for $8 billion in stand-by and other credits for this year and a further $6 billion to help stabilize the ruble in 1995. The IMF will most likely not deliver the credits until the government shows that it can cut spending to hold the budget deficit to 5% of GNP next year (compared to 11% at present) and reduce inflation to about 3% per month or less. The government is determined to follow through on its promises to the IMF but is feeling pressure from a wide range of groups, including labor (over unpaid wages), industrial managers, pensioners, etc. The situation intensifies the budgetary struggle with parliament, which will heat up after Mr. Chernomyrdin presents the government's budget to parliament at the end of October. The proposed budget is extremely tight, requiring cuts in almost every sector of the economy.
Western governments will have to agree to support a social safety net if they want to convince Russian politicians to cut subsidies to failing industries. Meanwhile, the politicians are going to be under even more pressure to issue credits in the face of price increases instituted during and after Black Tuesday. These increases in regulated prices are likely to survive challenge, resulting in higher prices across the board. This "cost-push" inflation will further jack up the costs of industry and lower the buying power of employees' wages. Many people with fixed pensions and low wages already cannot afford basic foodstuffs. These people comprise a large fraction of the electorate, and they are ultimately the ones who choose to vote for a reformer like Grigoriy Yavlinskiy or a neo-fascist like Vladimir Zhirinovsky.
So was it conspiracy, incompetence, or just politics as usual? Probably all three: certainly central bank credits to industry set the stage for higher inflation and pressure on the ruble, but government indecision about intervention and some currency speculation aggravated the drop. There may even have been a bit of malfeasance involved as well. The various theories explaining Black Tuesday aside, the Russian people and their leaders are facing a crisis and no amount of placing blame will help them. The coming winter will only worsen the situation as food becomes more dear and people's opinions more fierce. There is some breathing room before elections next December. The Russian leadership and Western experts should use that time to hammer out a stabilization package which will accelerate neither the population's decent into poverty nor the nation's slide into turmoil.
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