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:
- 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.
- The board shall have its legal seat in Switzerland.
- 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.
- 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.
- 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 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.
- 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.
- 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
- 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.
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.