Currency: The Hunt for a Safe Ruble

For bargain-hunting tourists, some of the cheapest deals on the planet these days can be found in the former Soviet Union. The choices are certainly limited, but Americans in Moscow with access to black-market rubles can, for example, enjoy a reasonable meal for as little as $3 or take home a room-size, handmade wool rug for less than $100. But the plunging value of the ruble that makes such deals available to foreigners has been a nightmare for the locals. Since Russian President Boris Yeltsin lifted price controls in January, a move that pushed the inflation rate to 200% that month, Muscovites say their money has fully earned the nickname fanera — plywood.

That is no joke. The collapse of the ruble has triggered an urgent debate over how to stabilize the currency. Without sound money, experts say, the drive to bring capitalism to the former Soviet republics could come to a halt. “For people to have a currency that is valueless gives a sense of outrage that is very difficult for any government to deal with,” says Scott Pardee, chairman of U.S. operations for the Yamaichi International securities firm. Concurs economist Steve Hanke of Johns Hopkins University: “An economy with dysfunctional money is like an engine that has run out of oil.”

The crisis has forced Russia to spend scarce U.S. dollar reserves as well as other hard currencies to prop up the ruble. Its commercial exchange rate stood at 70 to the dollar last week, improved from 114 to the dollar the week before. Rumors that authorities may act to strengthen the ruble further have spread waves of panic buying, with Russians forming two-hour lines at banks to turn in dollars for their homegrown currency. At many banks last week, people found to their dismay that rubles were virtually unavailable.

But Moscow’s intervention on foreign exchange markets is no substitute for long-term policies to stabilize the ruble. To achieve that goal, Yeltsin still counts on his January shock treatment, which eliminated price controls, to encourage farmers and manufacturers to produce more goods. That would bring supply in line with consumer demand and thereby moderate inflation. As inflation slowed, under this strategy, the ruble would become stable at home and freely convertible to dollars and other currencies on foreign exchange markets.

To speed the transition to a stable ruble, Russia has asked the U.S. and its allies for $30 billion of hard currency over five years, in addition to food and other aid. The money would go into a fund Russia would use to buy rubles as a means of maintaining the currency’s price. But critics argue that such a fund would swiftly run dry as ruble holders rushed to dump the money at the first sign of weakness.

The harsh truth, these economists say, is that the ruble cannot become stable without an overhaul of the economy far more thorough than what Yeltsin seems willing to risk. With 90% of Russia’s production, distribution and retail outlets still in the inefficient hands of the state, they contend, supply cannot rise enough to slow inflation and restore long-term value to the ruble. “This amounts to trying to square the circle,” says economist Nicholas Eberstadt, a Harvard research fellow. “The first step should be to privatize the factors of production.” Adds Francis Scotland, managing director of the Investment Bank Credit Analyst, a Montreal-based publication that tracks currency trends: “Trying to stabilize the ruble and make it convertible before you get to the root of hyperinflation just makes no sense.”

Some Western experts urge Russia to scrap the ruble altogether in favor of a new currency. Johns Hopkins’ Hanke calls for creation of a “currency board,” such as those used in Hong Kong and Singapore, that would circulate new cash and coins backed by dollars or other hard currency. The new Russian money would be as stable as the reserves behind it, Hanke argues, because holders could freely exchange their currency for whatever backed it up. The new money, he adds, would initially compete with the ruble but would soon drive out its rival.

Other former Soviet republics are already turning their backs on the ruble. Ukraine will launch a new currency called the grivna this spring; Ukraine has made coupons for the money the sole legal tender in state-owned shops. Officially pegged at a rate of one coupon per ruble, the scrip fetches up to 13 rubles on the Ukrainian black market. Belarus intends to issue its own new currency in April, and Moldova and Kazakhstan are planning to print new money as well. Such defections will flood Russia with ever more rubles as the neighboring republics begin exchanging the shaky currency for their own coin of the realm. The torrent could in turn thwart Russian attempts to stabilize the ruble at home.

No wonder some experts in Moscow are predicting that the ruble will soon join the Soviet Union on history’s trash heap. In an interview with the newspaper Rabochaya Tribuna, economist Yevgeni Petrakov foresaw the “downfall” of the ruble within several months and urged joint action by members of the Commonwealth of Independent States to ease the crisis. Other leading experts doubt that monetary reform by itself can revitalize the economy. “The main task now is not to manipulate finances,” Oleg Yashin, first vice president of the Savings Bank of Russia, told Pravda. Rather, he declared, “it is to enable every enterprise to develop, operate at full capacity, freely sell the output on the market and worthily reward the work of its personnel.”

As laudable as these goals are, Russia simply may not be up to the challenge. Without money that both the Russian people and the rest of the world can trust, Yeltsin’s vaunted reforms could prove to have as little enduring value as his country’s beleaguered currency.

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CREDIT: TIME Graphic by Steve Hart

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