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Russia Should Bet The Bank On The Ruble

Economic Viewpoint


On the surface, the news out of Russia is bad. Boris Yeltsin, who once stood for the hope of democracy and reform, turns out to be unstable, poorly advised, and all too often drunk. His Cabinet is packed with communist goons, and his advisers are shady. The failed war in Chechnya is a manifestation of a government adrift. The past few years have seen ultranationalist Vladimir V. Zhirinovsky get elected; a tremendous drop in industrial output, causing vast poverty; and the spread of corruption throughout the Russian economy. The entire era has been defined by hyperinflation and a plunging ruble.

But a far more optimistic view of Russia may be justified. Prime Minister Viktor Chernomyrdin is a rising star who just might fill the political vacuum of a divided Russia. Economic reformers are hard at work in the background. Many of the goons are gone.

The best news, however, is on the ruble. For the first time since Russia embarked on its long voyage toward a market economy, there is a realistic chance for stabilizing the ruble, and the Russian government should stake everything it has on the opportunity. Stabilizing the ruble would break the vicious cycle of depreciation and inflation, creating a monetary normality that would support Russia's budding democracy.

RED-HOT PRESS. Without much publicity, the economic team headed by Anatoly Chubais has taken major steps over the past half year toward improving Russia's monetary and fiscal position. Gone is the deeply misguided central banker Viktor Gerashchenko, who thought his job was to run the printing press red-hot. Against all odds, the central bank is now saying nyet to credits for bankrupt companies and collectivist agricultural enterprises. At this point, monetary performance is well within International Monetary Fund targets.

Fiscal policy, too, is on course. Tax collection is being reinforced and spending controls are better. The budget is vastly improved. Conditions have never been better to stabilize the ruble at last.

In fact, the market is already taking note of recent progress. Under the pressure of monetary control, inflation has come down since January from 18% to only 7%--yes, it still is per month--and the ruble has actually risen by almost 20%. Of course, funny things happen in a hyperinflationary environment. Russians who moved into dollars and gained when the purchasing power of rubles went to zilch are now grousing that the ruble is rising.

Nevertheless, the rising ruble is wind in the back of economic reformers. Emboldened by progress and taking advantage of the public furor over eroding dollar wealth, the government has just taken a first step in stabilization by announcing a trading band for the ruble of 4,300 to 4,900 to the dollar.

But that is not enough. This is the time to fix the ruble outright against the dollar. With a fixed peg, the government binds its own monetary hands and can offer a far stronger front against the ever-present demands for credit and ongoing inflationary pressures.

NO-MAN'S-LAND. Just as important, a stable currency is always a major boost in popularity for the leadership. That comes in good time for the December election, where it is singularly important to minimize the winnings of the communists and ultrarightists. The elections must produce more support for reform or else Russia will remain stuck in a no-man's-land between communism and a free-market economy.

It is not certain that the ruble stabilization will succeed. In monetary history, 3 out of 5 attempts fail. Yet there is no option but to keep trying. The timing is right. Russia just now has a lot of elements coming together: Chernomyrdin, who once opposed "market romanticism," has come around to support reform; the economic fundamentals look good; and the economic team under Chubais has demonstrated its worth in hard-nosed privatization. None of this is permanent unless Russia takes the risk of fixing the ruble rate and committing to stability.

Naysayers warn that Russia is not ready or that a fixed rate is a poor move compared with keeping money tight and the currency rate flexible. That advice comes typically from the IMF or central banks, which have no political stake in the outcome. Their advice is bad. If Russia fails to stabilize, then output, employment, and real wages will keep plunging, inequality will widen even further, and politics will become unmanageable. Russia faces the same problems--and more--that Austria and Germany had in the 1920s. Supporting ruble stabilization must be a priority for anyone who wants to avoid a sharp turn for the worse.BY RUDI DORNBUSCH

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