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No. 348

June 7, 1999

Replacing Potemkin Capitalism

Russia's Need for a Free-Market

Financial System

by Kurt Schuler and George A. Selgin

Executive Summary

mainly vehicles for subsidizing enterprises.

On August 17, 1998, Russia devalued the

Russia needs a genuinely capitalist monetary

ruble and stopped payment on its government

system. The system should have two pillars: the

debt, creating a financial crisis that continues

U.S. dollar, Russia's de facto free-enterprise

today. Some observers have blamed the financial

money, and sound banks. Foreign banks should

crisis, and the poor performance of the Russian

be allowed to compete on equal terms with

economy generally, on government policies that

Russian banks. The central bank should be elim

-

they claim are rigidly laissez faire. However, a

inated, and with it the privileged access of some

closer look at the Russian financial system

Russian banks to the resources of the Russian

reveals that it remains fundamentally socialist,

government. Similar reforms have been imple-

though it has superficial capitalist features.

mented at least in part in other former socialist

Attempts to preserve the value of the ruble and

countries with good results. In addition to fos-

to prop up Russia's ailing banking system are mis-

tering economic growth, the reforms have been

guided. The ruble is a currency of socialism; the

politically popular. The U.S. government and

government uses it as a tool for making forced

international institutions should learn from the

transfers of wealth from the Russian people to

experience of those countries and stop support-

inefficient enterprises that are holdovers from the

ing Russia's current monetary institutions.

socialist era. Russian banks likewise have been

___________________________________________________________________________________

Kurt Schuler is a senior economist with the Joint Economic Committee of the U.S. Congress and author, with Steve

H. Hanke and Lars Jonung, of Russian Currency and Finance: A Currency Board Approach to Reform

(1993). He participated in writing this paper before assuming his current position, and the views expressed here are

his own. George A. Selgin is an associate professor at the University of Georgia and an adjunct scholar of the Cato

Institute. He is the author of The Theory of Free Banking (1988) and Bank Deregulation and Monetary

Order (1996).