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tions, forbidding nonresident investors to

other countries that have experienced finan-

take money out of Russia less than one year

cial crises since July 1997, Russia has lacked

after they had put it in.

what one might call free trade in money. It

restricts freedom in currency and banking in

Restrictions on Foreign Currencies

ways that weaken its financial system. The

The dollar is the preferred currency in

International Monetary Fund and other local

Russia. Russians are estimated to hold $40

and foreign advisers to the Russian govern-

billion or more in U.S. dollar notes (paper

ment have unwittingly helped keep the finan-

money) alone, which is more than the entire

cial system weak by failing to understand the

supply of ruble notes and ruble-denominated

importance of free trade in money. There are

bank deposits. A Russian government official

six main types of restrictions on free trade in

has estimated the value of internal trade in

money in Russia today.

dollars at twice the value of trade in rubles.

An Unsound Ruble

(Still more trade--about 70 percent of the

total--is estimated to be done by barter, part-

The ruble suffered high and variable infla-

ly because it helps companies avoid taxes.)4 In

tion in the early 1990s and appears ready to

suffer again. The exchange rate of the ruble

addition, companies and wealthy individual

against major foreign currencies has also

Russians hold billions more dollars in for-

been highly unpredictable, falling 20 percent

eign bank accounts. Russians use the dollar

or more in a single day on a number of occa-

despite the government's efforts to discour-

sions. In contrast, for major currencies, such

age them from doing so. Officially, all pay-

as the dollar and the Japanese yen, a change

ments within Russia are supposed to be in

of 2 percent in a day is large and 5 percent in

rubles. In contrast, in the United States and

a day is extraordinary. Because the ruble is an

many other Western countries people are free

unsound currency, it has no credibility, so

to make contracts specifying payment in any

interest rates in the ruble have also been high;

currency and banks are free to take deposits

when the financial crisis began, short-term

and make loans in foreign currency.

Russian government securities bore interest

Banks as Agents of the Government

rates of 170 percent. As explained below, high

interest rates increase the difficulty of stabi-

During the last few years of the Soviet era,

lizing the currency.

the government allowed small cooperative

banks to open. After the Soviet Union dis-

Exchange Controls

solved, the Russian government allowed pri-

The largest banks

To support the ruble, the Russian govern-

vately owned banks and fully or partly priva-

ment imposes exchange controls. The con-

tized state banks. (Sberbank, a savings bank

are conduits

trols are not as restrictive as those that exist-

that has thousands more branches than any

through which

ed in the Soviet era, but unlike the dollar, the

other bank in Russia, remains majority

ruble cannot legally be traded for some pur-

owned by the Russian government.) Many of

the government

poses without special permission. In particu-

the larger banks are still at least partially

redistributes

lar, Russians cannot legally send capital

owned by government, either the federation

public funds to

abroad, which would improve their security

or local governments. Moreover, most

by allowing them to diversify their portfolios.

Russian banks are not operated in the way

favored firms.

However, restrictions have not prevented a

that Western banks are. The largest banks in

massive illegal flight of capital, estimated by

particular are not agents for mobilizing sav-

some sources to exceed $100 billion. (Such

ings and lending savings for productive activ-

statistics are little more than guesses, but it is

ities; rather, they are conduits through which

evident that the amount involved has been

the government redistributes public funds to

large.) When the financial crisis started, the

favored firms. The parliament will pass, and

Russian government imposed new restric-

the executive branch will endorse, a law

4