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Most Russian

contracts specifying payments in rubles;

Managers at some enterprises then diverted

moreover, the Russian government itself

the subsidies to buy dollars as a speculative

banks have not

should consider receiving dollars in payment,

hedge, rather than pay back wages owed to

functioned as

instead of or along with rubles. (For example,

workers. When inflation fell and real interest

banks at all.

when the United States was off the gold stan-

rates charged by the central bank rose after

dard during and after the Civil War, the U.S.

1995, Russian commercial banks borrowed

government accepted only gold--an interna-

dollars from abroad, to capitalize on the high

tionally acceptable currency--in payment of

real interest rates they could earn by buying

customs duties, while it accepted dollars for

government securities. In effect, the banks

other payments.) Finally, foreign banks in

gambled that the central bank would not

Russia should be free to accept deposits and

depreciate the ruble much. The Russian pub-

make loans in foreign currency subject to reg-

lic was less trustful and refrained from

ulations no more restrictive than those that

entrusting much of their savings to Russian

apply to rubles.9

banks except Sberbank, the state-owned sav-

ings bank. The August financial crisis amply

Making the dollar an official currency

confirmed the public's judgment.

should be a permanent measure, not a stop-

Unlike most Russian banks, the handful

gap pending reform of the ruble. The ruble as

of foreign banks operating in Russia both

it now exists is a remnant of socialism that

enjoy the confidence of consumers and lack

deserves to perish. Radical reform of the

access to subsidies from the Central Bank of

ruble to end its role as a currency of socialism

Russia and the Russian government.

is desirable; for example, the Central Bank of

Consequently, they have functioned as banks

Russia could be replaced by a currency board,

in a genuine capitalist monetary system do,

as we discuss below. But Russia's economic

channeling savings from depositors to bor-

development does not have to wait for the

rowers capable of turning a profit. As they are

government to get its act together on the

in many other countries where local banks

ruble, since Russians already use the dollar

are a powerful lobby, in Russia foreign banks

widely. Indeed, making the dollar an official

are severely restricted in the extent to which

parallel currency may hasten reform of the

they can compete with local banks. Outside

ruble by reducing the benefits the Russian

Moscow and St. Petersburg foreign banks

government can expect to obtain from creat-

have little presence. They are not allowed to

ing inflation with rubles.

establish big branch networks that could

Good Banks

compete with Russian banks in attracting

deposits from consumers and small busi-

A sound currency is a good first step to

nesses. Foreign banks have been legally pre-

promote economic growth in Russia, but it

vented from attracting scarce Russian savings

needs to be complemented by good banks.

and converting them into productive invest-

That is especially true, given the lack of well-

ments, while Russian banks have failed to do

developed capital markets in Russia, such as

so because Russians do not trust them and

markets for corporate bonds, that could sub-

because dealing in subsidies has been more

stitute for banks as devices for financing

lucrative than ordinary banking.

businesses. Most Russian banks have not

Because Russian banks had been system-

functioned as banks at all. They have not

atically wasting resources, their collapse in

gathered savings from depositors, screened

the August financial crisis was a blessing in

borrowers, and directed savings to the most

disguise, except to the extent that the govern-

profitable investments. Instead, between

ment is spending more money to rescue

1992 and 1995, they provided indirect subsi-

them. The collapse of the banks weakens sup-

dies by lending funds provided to them by

port for Russia's protectionist banking poli-

the Central Bank of Russia at low rates of

cies, opening the way for more foreign banks.

interest, relative to inflation at the time.

8