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Foreign banks can function as genuine gath-

Payments can be delayed for days or weeks in

erers of savings and allocators of investment.

transit, often by banks that profit from using

To enable them to do so, the Russian govern-

the float in the meantime. Delays remain

ment should liberalize its licensing proce-

despite efforts by the central bank, which

dures for foreign banks, eliminate limits on

operates the heart of the system and regu-

foreign ownership of stock in Russian banks,

lates the rest. This is yet another monetary

allow foreign banks to establish branches

problem best corrected by getting govern-

anywhere in Russia, and eliminate the two-

ment out of the way. Private enterprise has

year delay it imposes on foreign banks wish-

developed and operates efficient payments

ing to do retail banking business. Foreign

systems in many Western countries. It can do

creditors of failed Russian banks should be

likewise in Russia, if permitted. The central

allowed to receive up to 100 percent stock

bank has discouraged competition with the

payments system it operates.11 The central

ownership in the failed banks in compensa-

tion for overdue loans.

bank's own clearinghouse facilities should be

The combined effect of those changes will

privatized, and it should allow other clearing-

enable foreign banks to enter retail banking

houses to be established without requiring

more quickly. Although retail banking is not

them to obtain a special license.

Western govern-

especially profitable in developed nations, it

All these reforms must originate with the

ments and inter-

is potentially lucrative in Russia, since the

Russian government. However, Western gov-

country is underserved by good banks. A

ernments and international financial institu-

national financial

Citibank or Deutsche Bank could attract as

tions can encourage reform by ceasing to pro-

institutions can

deposits billions of dollars that Russians now

vide foreign aid that props up the ruble, the

encourage reform

stuff under their mattresses or stash in bank

Central Bank of Russia, and Russian com-

accounts abroad.10 It will still take time for

mercial banks in their current condition.

by ceasing to pro-

Merely attaching to loans "conditions," like

foreign banks to establish broad networks in

vide foreign aid

those of the International Monetary Fund

Russia, but it could take much longer to

that props up the

that have not been taken seriously, has

rebuild confidence in a protected banking

worked badly so far and will not create the

system that remains overwhelmingly owned

ruble, the Central

fundamental changes necessary to introduce

by Russians.

Bank of Russia,

a capitalist monetary system.12 As the

Deposits at foreign banks should carry no

Russian government guarantee. It would be

Russian economist and reform politician

and Russian com-

preferable if deposits at Russian banks car-

Grigory Yavlinsky has said, past loans to the

mercial banks.

ried no government guarantee either. The

Russian government have only served as a

sole exception may be Sberbank, the govern-

drug helping to maintain an unhealthy sys-

tem.13  True reform requires changing

ment-owned savings bank that has the only

comprehensive nationwide branch network.

Russia's monetary institutions rather than

Preferably, Sberbank should be sold to a

propping them up.

sound foreign bank or banks, in which case it

should not be insured. But if that is not polit-

Effect of the Reforms

ically possible at present, a second-best policy

would be to operate it like a postal savings

bank, meaning that it would offer low inter-

Intensifying dollarization of the Russian

est rates on deposits but would invest only in

economy, as we propose, will reduce the

very low-risk securities. (Under current con-

demand for rubles. Unless the government

ditions, that would imply that it would not

takes counteracting steps, such as establish-

invest in Russian securities.)

ing a currency board (described in the next

section), the real value of existing ruble notes

An Efficient Payments System

and deposits will fall. Contrary to conven-

Russia lacks an efficient payments system.

tional wisdom, under existing arrangements

9