Sudden, Stealthy And Crazy

Boris Yeltsin had earned a vacation. His victory in the April referendum and the progress on a new constitution had put his anti-reform opponents on the defensive. After a long, humiliating slide, the ruble had strengthened, and the battered economy appeared to have reached bottom. At the economic summit in Tokyo, Yeltsin won a commitment of $3 billion in Western privatization aid. Hoping that Russia had achieved a measure of stability, Yeltsin went off in mid-July to a lakeside dacha near Novogorod.

That proved to be a big mistake. While Yeltsin was relaxing, his enemies in Moscow launched a major counterattack. The conservative-dominated Parliament passed laws to slow privatization, bail out communist-era industrial dinosaurs, and ban foreign banks from serving Russian customers. But the crowning blow came on the soggy Saturday morning of July 24: The Russian Central Bank proclaimed that all bank notes issued from 1961 to 1992, at least 20% of the cash in circulation, would no longer be valid. Terms of exchange were tough: Russians had only two weeks to switch a limit of 35,000 old rubles ($35) for new ones, with the rest frozen in low-interest savings accounts.

The result? Pure pandemonium. From Volgograd to Vladivostok, frightened Russians went on buying binges, snapping up everything from outdated cans of food to live rabbits. On Monday morning, they began lining up in angry queues at savings banks, trying to trade in old bills for new ones. Many of the banks hadn't even been supplied with new cash. For inflation-weary citizens, the move smacked of old-time communist diktat, not the enlightened populism they had come to expect from Yeltsin's government.

While President Clinton showed no signs of wavering in his determined support of Yeltsin, the increasingly open warfare over policy could jeopardize Western aid flows. Says a senior Western financial official in Moscow: "It is another sign that the authorities of Russia cannot be trusted."

The botched ruble policy even calls into serious question Yeltsin's ability to control his government. Prime Minister Viktor Chernomyrdin backed the ruble move, along with Central Bank Chief Viktor Geraschenko. Yet the decision was made without informing Boris Fyodorov, the Finance Minister who is Yeltsin's point man on economic reforms. What Yeltsin knew of the policy beforehand remains unclear.

Both Yeltsin and Fyodorov hurried back to Moscow, and Yeltsin softened the terms of the currency callback--upping the limit to 100,000 rubles and extending the trade-in period until the end of August. But by then, the damage was done. Geraschenko, whose free-spending ways have jeopardized economic recovery in the past, quickly took Yeltsin to task, claiming that in general terms the President had known all along about the forthcoming ruble switch.

No matter who was conspiring against whom, the fallout is destroying the sense that Russia's economy was finally stabilizing. Erratic leadership, combined with expected higher prices for fuel and grain in the fall, are likely to send the ruble tumbling again. Also, renewed combat between industrialists and reformers in Yeltsin's government will make it harder to push the tight money needed to stifle hyperinflation and to lead toward recovery.

RALLYING CRY. Yeltsin's appearance of blundering gives his enemies a big political opening. Parliamentary Chief Ruslan I. Khasbulatov, Yeltsin's main antagonist, is using the ruble brouhaha as a rallying cry against incompetence in the government. He is expected to unveil his own constitution this week, which will undoubtedly maintain the old communist-era legislature. That will be in sharp contrast with Yeltsin's version, which would try to sweep away conservative legislators by holding new elections this fall or next spring.

Also hovering in the wings is Arkady Volsky, the former Communist Central Committee member who is leader of Civic Union, an influential centrist group of Russian industrial managers. On July 23, Volsky announced that a new political party, called Renewal, would take the field this fall. Among its goals: slowing privatization to give former Communist apparatchiks more control.

Geraschenko claims his drastic move was aimed at curbing 15%-a-month inflation. While calling in old bills is technically an anti-inflationary step, it does nothing to address the much more important causes of inflation: huge budget deficits and noncash credits used to prop up flagging industries. Indeed, conservative forces in the Parliament recently pushed through a highly inflationary budget for 1994. It calls for a deficit of 25 trillion rubles, or about 30% of gross national product. The state industries continue to be the biggest drain. Yeltsin, who will probably try to reject Parliament's budget, wanted a deficit of only about 12 trillion rubles.

The Central Bank claims the abrupt call-in was needed to foil counterfeiting and to begin to get rid of old bills bearing likenesses of Lenin and other discredited heroes. The bank also said it was trying to prevent old rubles still circulating in other former Soviet republics from flowing back into Russia and fueling inflation.

But economists discount the seriousness of this ruble threat. While small republics such as Georgia and Armenia are still using the ruble, Ukraine, the second-largest, has largely replaced the Russian currency with a temporary Ukrainian version, the karbovanetz. The Baltics have also ditched the ruble.

"VIOLENT ACTION." It is almost as if the architects of the ruble callback designed it to create maximum political damage inside Russia and in relations with former Soviet republics. Ukrainian officials, for example, are irritated at the Central Bank's taking such a step without informing them--even though just two weeks before, the three Slavic countries of Russia, Ukraine, and Belarus had tentatively agreed to form a new economic union. Russia's move, says Vitaly Tykhy, head of the Donetsk branch of the Ukrainian National Bank, is "an unfriendly and violent action."

Typical Russians, meanwhile, have nothing but contempt for the mayhem. The ruble ruling, at least for a couple of days, meant that Muscovites were hard-pressed to take buses or subways, because all small bills were invalidated. Many travelers were stranded. On July 26, Sergei Ivanchenko, a welder from Norlisk, a Siberian town above the arctic circle, fumed as he waited in line at a savings bank near Moscow's Kiev Railway Station to exchange money. Stuck in the capital by the ruble fiasco, he curses the Central Bank chief: "I'd like to see Geraschenko with both of his hands cut off right now."

Indeed, calls for Geraschenko's resignation are growing louder in the Supreme Soviet and in Yeltsin's government. Finance Minister Fyodorov joined the chorus, telling reporters on July 28 that the ruble move, "a stupid act," was "against the President, against the leadership, and against Russia." For Yeltsin, the only good that may come of the debacle might just be Geraschenko's resignation--and a much better understanding of what central banking is all about.

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