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a decline in the importance of the ruble

efficient, transparent system, financed by tax

would ultimately help Russia. The less people

revenues, that provided money directly to

use the ruble, the less ability the Central Bank

needy people.

of Russia will have to finance government

Fully dollarizing the Russian economy

spending by printing more rubles. The gov-

will eliminate the government's ability to

ernment will have less ability to subsidize

profit by printing money but will tend to

enterprises: even if the amount of rubles

increase the government's ability to borrow.

printed remains the same, the real value of

Before it defaulted in August, the govern-

the subsidies will tend to fall. Formerly subsi-

ment was paying interest rates in dollars

dized enterprises will have to stop wasting

roughly one-tenth of the rates it was paying

resources or go out of business.

in rubles. Dollarization will eliminate the

Many workers and pensioners depend

huge devaluation risk premium that the gov-

on newly printed rubles to survive.

ernment was paying on its ruble securities,

Eliminating the ruble does not have to jeop-

though dollarization will not eliminate

ardize them, however; in fact, it can help

default risk.

them. The underlying problem of the

Some people may claim that the Russian

Russian economy is that many workers are

government cannot survive without resort to

unproductive. The current monetary sys-

the printing press, since it spends more than

tem perpetuates the socialist charade in

it collects in taxes. The official 1999 budget

which workers pretend to work and the

projects a deficit of 105.5 billion rubles,

government  pretends  to  pay  them.

which is roughly 2.5 percent of GDP and, at

Resources continue to be wasted on unpro-

the current exchange rate, amounts to rough-

ductive activity in part because government

ly $4 billion. Moreover, the budget projec-

uses the monetary system to muddy the dis-

tions almost certainly overstate tax revenue

tinction between productive and unproduc-

and understate spending. But to claim that

tive activities. Intensifying dollarization

Russia's problem is insufficient tax revenue,

would make the distinction clearer, aiding

and to justify keeping the ruble as a way to

considerably the movement of resources

supplement tax revenue, is to overlook the

out of unproductive activity and into pro-

government's real problem, which is that it

ductive activity. That potentially means a

spends too much on subsidies and entitle-

better standard of living for most Russians,

ment programs that are legacies of Russia's

including pensioners and unemployed or

socialist past.

underemployed workers. The more produc-

Another criticism of dollarization, and of

The current mon-

tive the economy is, the more resources

related proposals for a Russian currency

there are to provide for the old, the sick,

board, is that it will leave the Russian govern-

etary system per-

and the jobless.

ment unable to cushion the economy against

petuates the

The current monetary system mixes sup-

external shocks. The experience of Russia in

port for workers and pensioners with subsi-

the 1990s--indeed, throughout this centu-

socialist charade

dies for "investment" by enterprises. Less

ry--has been that central banking has created

in which workers

than half of all credits that the Central Bank

far more shocks than it has absorbed. That is

pretend to work

of Russia grants to enterprises (through com-

why, despite efforts by the government, the

mercial banks) are used for paying workers.

free-market sector of Russia's economy

and the govern-

Enterprise managers use the rest to buy for-

already uses dollars more than rubles.

ment pretends to

eign currency as a hedge, to buy materials or

Permitting foreign banks to establish

pay them.

machinery, or to line their own pockets--

branches all over Russia will draw billions of

none of which helps workers and pension-

dollars now stuffed in mattresses or stashed

ers.14 Intensifying dollarization would force

in bank accounts abroad. It also may facili-

tate increased foreign investment, since for-

the Russian government to replace its ineffi-

eign companies considering doing business

cient, opaque welfare apparatus with a more

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