Even though the formation of Russia’s latest government looks like an exercise in chaos theory, there should be no doubt about the general course of economic policy. The government is pumping rubles into the economy, paying off its employees, suppliers and other creditors with rubles that are rapidly losing their purchasing power. The Central Bank last week forecast inflation for 1998 at 240-290 percent, essentially all of it coming after the devaluation and default of August 17.

The Central Bank’s action to inflate the currency is resolving the confusions and contradictions of the first few weeks of the government of Prime Minister Yevgeny Primakov. Those who object to inflation are ignored or swept aside. On Friday, Deputy Prime Minister Aleksandr Shokhin, who had been telling Western banks and the IMF that Russia would stabilize the ruble, resigned in disgust. He had lasted thirteen days in his post.

The next act in this immolation of the ruble is likely to be the refloating of the banks, which collapsed when their most important assets, a large pile of short-term IOUs issued by the government, were exposed as nearly worthless. Now those IOUs–in Russian, GKOs–are to be redeemed with freshly minted and printed rubles, which the banks can then use to pay their obligations to depositors and to each other.

Western banks also hold GKOs, about US$11 billion worth at face value, and they hold loans to Russian banks and corporations with a face value of around US$19 billion. Western bankers complain that the Russian government won’t offer them a deal on the GKOs as good as it is giving the Russian banks. That is true, and there is not too much they can do about it. The threat of withholding future lending seems empty. Western lending does not figure prominently in such plans as Russia’s new economic policymakers have for the country’s future.