Publication: Prism Volume: 4 Issue: 23

By Valery Virkunen

Yevgeny Primakov’s government marked its arrival with a call to restrict the circulation of foreign currency in Russia. This call was supported by many members of the opposition and by a number of regional leaders. Sverdlovsk Oblast Governor Eduard Rossel, for example, made a controversial speech on the issue. Although there soon followed reassuring clarifications from the government, the desire of the authorities to drive the dollar out of Russia is beginning to take shape.

According to various estimates there are currently between US$60 billion and US$70 billion in circulation in Russia. This means that the country has more or less given the United States this sum as an unlimited interest-free loan. The well-known Russian economist Sergei Glazev, head of the analytical department of the Federation Council (the upper house of the Russian parliament), says that the entry of cash dollars into Russia entails an intensive drain of Russian capital out of the country. Russia supplies the world market with oil, gas and metals and receives cash in return–the right to buy goods in America. But until these goods are bought, the United States will use the interest-free Russian credit to the tune of US$60 billion-plus and strengthen its national currency. Naturally, crediting a flourishing foreign economy cannot go on indefinitely.


It is probably not possible to find even one civilized country where so much foreign currency circulates in the national economy. The value of the foreign cash is more than twice that of Russian cash reserves. This sort of thing does happen, of course, in states which are unable to ensure a stable circulation for their national currency. They are forced to tie their financial system to that of a stronger state.

As a rule this happens in very poor countries with underdeveloped economies, in Africa or Latin America for example. Banana republics draw dollars into their economic system, which leads to a sharp increase in the outflow of their national resources.


One of the reasons that people throughout the world trust the American currency is its dependability. According to officials of the U.S. Department of Treasury, American money has never been withdrawn from circulation, devalued or revalued since 1861, when the U.S. government first issued paper currency.

After 1992 U.S. dollars began flooding into Russia. The government of young reformers was too hasty in letting foreign currency into the country. Russian citizens immediately realized that with spiraling prices, the only way to beat inflation was to buy dollars with their rubles and put them aside for a rainy day. But the problem is that most Russians do not trust banks and thus keep their dollars at home. The example of the state Savings Bank is too fresh in people’s memories: In 1992, with the help of hyperinflation, the state wiped out the value of everyone’s savings. The purchasing power of the Russian currency fell by a factor of 10,000 during the reform years. Of course, the Russian government will not even contemplate indexing savings accounts. This is why the American currency has become a sort of anchor stabilizing the family budget–in other words, cash dollars have become real treasure. It is not only Russia’s citizens who take refuge in dollar savings, but also its commercial banks, companies and organizations.

There is nothing the Russian government can do about cash dollars. The American currency can not be devalued, revalued or depreciated in any other way by order of the Central Bank. Its purchasing power is as immutable as America itself. The U.S. Federal Reserve system is not dependent on the muddle in Russia. The people will continue to trust the dollar until the Russian government proves in practice that the Russian financial system can be as reliable and consistent as the American one.


The dollar is of course good and reliable. For the time being. This was nicely illustrated by the latest bout in the financial crisis which flared up on August 17. The exchange rate against the dollar rose from 6 to 17 rubles in less than a week. The collapse of the Russian ruble buried several hundred commercial banks, small businesses and the trade sector beneath the rubble. It was immediately and universally clear that Russia had never enjoyed any financial stability. The achievements of the reforms were proven false. In fact, this was inevitable: Most Russian enterprises are at a standstill, nothing is being produced, unemployment is on the increase and those who are employed go without their wages for months on end. Everyone is convinced that there is no financial market in the normal sense in Russia, and that, moreover, there never has been. The Russian manufacturing industry is as yet unable to produce competitive products which will find a niche on the world market. Exports are purely of raw materials. Hardly anyone bought or sold Russian company securities. Bidders simply sold each other the fabulously profitable ministry of finance short-term bonds–GKOs–which produced an annual return of up to 350 percent and beat dollar speculation hands down.

After the Central Bank had, out of purely political considerations, spent more than US$22 billion to prop up the ruble artificially, it dawned even on the government that the country was on the edge of a precipice. As soon as they stopped supporting the ruble, it collapsed, followed swiftly by the consumer market. Imported consumer goods amounted to 70-85 percent of the total, particularly in Moscow, St. Petersburg, Yekaterinburg and other large cities. Although the dollar prices for these goods remain unchanged to this day, or have even fallen, ruble prices have risen 250-300 percent and have gone beyond the reach of the average consumer. It has become totally unprofitable to import consumer goods. Bankrupt Russian businessmen, who were making a perfectly good living importing food products, household appliances and cars, say that the American dollar has been transformed from treasure into a noose.

Today many representatives of the authorities and business circles propose replacing the dollar with the so-called “gold” ruble. This idea was conceived at presidential level by Sverdlovsk Oblast Governor Eduard Rossel. He proposed prohibiting the circulation of foreign currency in Russia, tying the Russian ruble closely to the gold reserves of the Central Bank and introducing a gold content for Russian money. The governor’s proposal caused quite a stir, but experts detect a reasonable amount of good sense in it.

Russian economists suggest extending the internal gold market. Valued gold bars and coins should be freely bought and sold by companies and individuals. Today people will only part with their dollars if they are offered in exchange a no less significant treasure. Gold. Although the Russian gold market officially exists, it is burdened by 20 percent value-added tax. If an individual wants to sell a gold ingot he has bought, he will lose 20 percent of the money he invested in it.


Eduard Rossel is not the only one to propose exchanging the dollar for a gold ruble. According to the governor, the proposal was carefully drawn up during board meetings of the Ural Economic Association and is included in a package of draft programs of Yevgeny Primakov’s government. The influential Association of Russian Banks has also approached the government with its proposals for freeing Russia of domination by the dollar. President Yeltsin requested Central Bank chief Viktor Gerashchenko to study ways of driving foreign currency out of the country. All this indicates that a key moment is at hand in the war with the dollar.

Economists anticipate that driving cash dollars out of Russia will bring back a significant proportion of the capital taken out of the country illegally. According to the estimate of Sergei Glazev, if Russian people and businesses have the courage to exchange the entire US$60 billion worth of hard currency in the country into rubles, no less than 900 billion rubles will be injected back into the national economy. This is the equivalent of the federal budget for two years. This process cannot take place all at once, of course. Even if, however, it is spread out over five years, US$12 billion will be put back into the Russian economy every year–an amount several times greater than the volume of credits extended to Russia by the World Bank and the International Monetary Fund.

With the general public distrust of the government, it will not be that easy for the Russian ruble to defeat the dollar. Inflation has once again set off on its destructive gallop. In October inflation reached 4.5 percent. In November, prices will rise by considerably more. Against this background, people will certainly not want to exchange their dollar savings for the plummeting ruble. According to sources close to the government, the authorities are well aware of this, and are not ruling out introducing coercive administrative measures alongside economic methods for putting pressure on holders of foreign currency.

In the Federation Council draft laws are already being drawn up to stop the flow of capital out of the country. A general requirement is the creation of a favorable climate for encouraging direct foreign investment into Russia. Legislators have set themselves the task of stopping financial speculation and stimulating the growth of the real sector of the economy. The situation requires greater state foreign exchange regulation of the export operations of companies exporting oil, gas and metals. Analysts forecast a tightening of import controls. The right to buy foreign currency may be granted only to companies and organizations who need to pay import contracts for bringing products into Russia.

It is also proposed that strict limitations be imposed on individuals bringing cash foreign currency into the country. All companies, with the exception of the Central Bank, may be prohibited from bringing in foreign currency in cash.

However, it is unlikely that the government will risk introducing coercive measures against Russian holders of foreign currency. Public reaction to the “trial balloon” was so negative that Yevgeny Primakov and Yuri Maslyukov rushed to make reassuring noises. A sudden “de-dollarization” of the economy is unlikely to happen. Russians will only part with their “greenbacks” as long as the authorities do not swindle the population again. Time and stability are required to rebuild the trust which has been lost. But for now, the Russians trust cash dollars more than they do their own government.

Valery Virkunen is a correspondent for “Argumenty i fakty.”