Russia's financial
important, not just for Russians, but for the
Introduction
world.
system today has
Despite the appearance of reform, in
neither the crude
On August 17, 1998, Russia entered a
important ways Russia's financial sector is
coherence of a
financial crisis that continues today. The
little changed from the Soviet era. Other for-
Central Bank of Russia, yielding to specula-
mer socialist countries that have made more
socialist financial
tive pressure that had been building for
thoroughgoing market-oriented reforms of
system nor the
months, allowed the ruble to depreciate
their financial systems have enjoyed mone-
against the U.S. dollar. The ruble quickly
tary stability and economic growth. Their
more polished
plummeted from about 6.3 per dollar to 10
experience indicates that the proper financial
and efficient
per dollar. (The ruble has since depreciated
reforms in Russia can be politically popular
coherence of a
further, to about 25 per dollar. Given that a
as well as economically beneficial.
new ruble worth 1,000 old rubles was intro-
market-based
duced at the start of 1998, the ruble today is
financial system.
Russia's Financial System
worth, in dollars, about one-thousandth of
what it was at the end of 1990.) The depreci-
ation left many of the largest Russian banks
To understand the causes of the financial
in effect bankrupt because they had large dol-
crisis, one must understand the Soviet,
lar liabilities backed by ruble assets that
socialist roots of Russia's financial system.
overnight became much less valuable. The
Under socialism, the ruble was an inconvert-
government for its part defaulted on its
ible currency, meaning that people could not
bonds.
legally exchange it for foreign currency and it
The financial crisis has plunged the
had practically no value outside the borders
Russian economy back into recession.
of the Soviet Union. Inside the Soviet Union,
According to official statistics, in 1997 the
monetary exchange did not work the way it
Russian economy grew slightly for the first
does in market economies. For consumers,
time in this decade. The growth was less than
money was necessary but not sufficient to
1 percent, but it gave hope that the Russian
buy goods through official channels. Many
economy had finally turned the corner. The
goods could be purchased only on the black
financial crisis has smashed that hope. The
market or bartered for through an elaborate
International Monetary Fund estimates that
network of favors. State-owned enterprises
the Russian economy shrank 5.7 percent in
were not free to spend the money in their
1998 and will shrink 8.5 percent in 1999.
bank accounts; they needed permission from
Inflation, which looked like it would be in
the central planning bureaucracy to spend
the mid single digits before the crisis, ended
money on anything other than wages and
up at 84 percent in 1998.1
routine purchases of materials from suppli-
ers. Lack of funds in the bank did not neces-
A number of Russian and foreign
sarily constrain enterprises, for if they could
observers are blaming the financial crisis, and
convince the planning bureaucracy that they
more generally the Russian economy's
badly needed the money, the bureaucracy
wretched performance in recent years, on the
would order a state-owned bank to credit the
government's allegedly rigid laissez-faire
approach to economic reforms.2 Many
enterprises with funds.
Under socialism, the banks were not real
Russians are even nostalgic for the Soviet era.
banks. State-owned banks were merely con-
A return to a more Soviet-type government,
duits for conveying funds from the govern-
with less economic freedom, less democracy,
ment to enterprises and taxes from enterpris-
and a belligerent foreign policy, is readily
es to the government. The banks were the
imaginable, given that so many Russians are
bookkeepers of socialism. Unlike banks in
worse off today than they were under social-
market economies, they did not compete for
ism. So the debate about economic reforms is
2