Foreign Policy Briefing No. 49

The Case for a Russian Currency Board System

Executive Summary

The devaluation of the Russian ruble this year was predictable, especially considering Russia’s poor monetary history. State-manipulated money has been a Russian hallmark since the time of Peter the Great and shows that the country’s money problems are endemic and do not depend on who controls the central bank. Czarist, Soviet, and post-Soviet governments have used the central bank printing press to finance deficit spending, resulting in high inflation, confiscation of savings, capital controls, or a combination of the three.

To establish monetary stability, Russia should allow the dollar to circulate legally with the Russian ruble and institute a currency board that would issue rubles. The rubles would be fully convertible on demand at a fixed exchange rate with the dollar and be backed 100 percent by the dollar. Both practical measures would create sound money immediately. They would also gain immediate popularity as they did when they were implemented in the past. For a Russian currency board system to work, however, it must not be allowed to deviate from ultraorthodox rules as do the currency-board-like systems of other countries.

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