Commentary

Create a Currency-Board Law for Russia

This article appeared in The Wall Street Journal Europe on Monday, September 7, 1998.

Russia’s acting Prime Minister Viktor Chernomyrdin says he wants to introduce a currency board as part of his strategy to save the ruble and deliver sound money to the suffering Russian people. If he is serious, and really aims to establish a classical, orthodox system, then parliament should drop its opposition to him. Mr. Chernomyrdin has been distressingly short on details, however. I have advised several governments on how to introduce such a system, and I have studied Russia in particular, so below is my proposal on what a currency-board law (and related currency law) for Russia should be like.

Until the proponents of a Russian board deliver such a law, their loose talk about such a system is meaningless. A currency board rests on a monetary constitution, a law. The establishment of sound money in Russia will be a Herculean task. Russia has entered a pre-revolutionary political phase. The economy is neither a communist system nor a capitalist one, but that doesn’t mean that it’s in a period of transition: Russia has not been moving toward a market economy. Today, the Russian economy is a mutation of the old communist system and is totally dysfunctional.

The first step on the road to sound money should start with the hoard of greenbacks in Russia, which at $40 billion exceeds the value of rubles in circulation by a ratio of almost 5 to 1. To mobilize all that mattress money, the Russian government should grant all foreign currencies official legal status immediately so that they can circulate and be used on a co-equal basis with the ruble. This competitive currency regime should remain in place even after the introduction of a currency board.


Anything less than an ultra-orthodox currency board will not command the confidence of the Russian people and will doom Russia’s attempt to establish one.


To put the ruble on a sound competitive footing, the Russian government should announce immediately that an ultra-orthodox board law will be implemented as soon as possible. Indeed, if the Russian board is modeled after the currency board-like systems in Hong Kong, Argentina, Estonia, Lithuania, Bulgaria and Bosnia, it will probably fail. These systems deviate from orthodoxy in many respects, notably because they possess lender-of-last-resort powers. Russia’s system must avoid such deviations.

To implement a currency-board system in Russia’s truly unique situation, the board needs to command the respect and confidence of the justifiably skeptical Russian people. This is why Russia’s monetary law should look like this:

  1. The Russian currency board is hereby created. The purpose of the board is to issue notes and coins in rubles, and to maintain them fully convertible at a fixed exchange rate into a reserve currency as specified in paragraph six.
  2. The board shall have its legal seat in Switzerland.
  3. The board shall be governed by five directors. Three directors shall be non-Russian citizens appointed by the Bank for International Settlements (BIS) in Basel, (this would help avoid the fear of political tampering). They shall not be employees of the International Monetary Fund or its member governments. Two directors shall be appointed by the government of Russia.
  4. A quorum shall consist of three members of the board of directors, including at least one of the directors chosen by the government of Russia. Decisions shall be by majority vote, except as specified in paragraph 15.
  5. The first two directors appointed by the Russian government shall serve terms of one and four years. The first three directors appointed by the BIS shall serve terms of two, three and five years. Subsequent directors shall serve terms of five years. Directors may be reappointed once. Should a director resign or die, the BIS shall choose a successor to complete the remainder of the term. In case it is a Russian director, then the Russian government should reappoint his successor.
The board of directors shall have the power to hire and fire the board’s staff, and to determine salaries for the staff. The bylaws of the currency board shall determine salaries for the directors. The currency board shall issue notes and coins denominated in board rubles. The notes and coins shall be fully convertible into the reserve currency. The notes shall be printed outside Russia. The currency board may accept deposits of the reserve currency.
  1. The reserve currency is the foreign currency to which the board ruble has a fixed exchange rate. Initially, the reserve currency shall be the U.S. dollar and the fixed exchange rate shall be one “new” board ruble equal to one dollar.
  2. Failure to maintain the fixed exchange rate with the reserve currency shall make the currency board subject to legal action for breach of contract according to the laws of Switzerland. This provision does not apply to embezzled, mutilated or counterfeited notes, coins and deposits, or to changes of the reserve currency in accord with paragraph 13.
The currency board shall charge no commission for exchanging rubles for the reserve currency, or the reverse. The currency board shall begin business with foreign reserves equal to at least 100% of its notes and coins in circulation and any deposits held with the currency board. It shall hold its foreign reserves in securities or other forms payable only in the reserve currency. These reserves shall be held on deposit at the BIS. The currency board shall not hold securities issued by the national or local governments of Russia, or by enterprises owned by those governments. The currency board shall pay all net seigniorage (profits from its holdings of U.S. dollar bonds) into a reserve fund until its unborrowed reserves equal 110% of its notes and coins in circulation and deposits. It shall remit to the government of Russia all net seigniorage beyond what is necessary to maintain 110% reserves. The distribution of net seigniorage shall occur annually. The head office of the currency board shall be in Moscow. The board may establish branches or appoint agents in other cities of Russia. The board shall also maintain a branch in Switzerland. The currency board shall publish a financial statement, attested by the directors, monthly or more often. The statement shall appraise the currency board’s holdings of securities at their market value. The currency board may issue notes and coins in such denominations as it judges to be appropriate. Should the annual change in the consumer price index in the reserve country—fall outside a range of -5% and 20% for more than two years, or -10% and 40% for more than six months, the currency board must, within 60 days, either:
  1. devalue (if the change in the index is negative), or revalue (if the change in the index is positive), the board ruble in terms of the reserve currency by no more than the change in the index during the period just specified, or
  2. choose a new reserve currency and fix the exchange rate of the board ruble to the new currency at the rate then prevailing between the new reserve currency and the former reserve currency.
If the currency board chooses a new reserve currency in accord with paragraph 13, it must convert all its foreign reserves into assets payable in the new reserve currency within one year. The currency board may not be dissolved nor may its assets be transferred to a successor organization except by unanimous vote of the board of directors. Beyond an initial loan of reserves from the IMF, the currency board may not accept loans or grants of reserves from international agencies or foreign governments. Exchanges of currency by the currency board shall be exempt from taxation by the Russian governments. Currency-board rubles and the reserve currency shall be legal tender for paying taxes and settling debts in Russia. However, they shall not be forced tender for contracts between private parties.

These 18 points are exhaustive and Russia’s system should include all of them. The devil always resides in the details, particularly in Russia. Anything less than an ultra-orthodox currency board will not command the confidence of the Russian people and will doom Russia’s attempt to establish one.

Steve Hanke is a Cato Institute adjunct scholar and professor of applied economics at the Johns Hopkins University in Baltimore. He is the author (with Lars Jonung and Kurt Schuler) of Russian Currency and Finance: A Currency Board Approach to Reform, Routledge (1993).