Publication: Monitor Volume: 4 Issue: 172

Over the weekend the Russian Central Bank undertook a giant debt-clearing operation in a bid to restart Russia’s stalled financial system. At the same time, in a series of statements to the press, Prime Minister Yevgeny Primakov fleshed out the government’s general financial strategy.

On Friday the Central Bank of Russia (CBR) gathered lists of debts from the leading commercial banks in Moscow, St. Petersburg and Samara. The CBR will provide cash to the banks in order to enable them to meet their obligations. It also hopes to restart the flow of payments which ground to a halt after the government’s August 17 freezing of repayments of treasury bonds (GKOs). The bailout money will come from the commercial banks reserve funds at the CBR, worth about 27 billion rubles (US$1.7 billion), and from buying back the GKOs which the banks hold (on which payments were previously suspended). The CBR will have to release additional rubles in order to cover the banks’ obligations: Bank chairman Viktor Gerashchenko admitted that “we cannot do without printing [money]” (Trud, September 18). Some estimates put the money emission required at less than 10 billion rubles. Denis Kiselev, however, the former head of the supervisory department at the Central bank who was fired by Gerashchenko, estimated the amount required to refloat the commercial banking system at 40 billion rubles (Kommersant Daily, September 19).

Many analysts fear that this monetary emission will ignite a fresh round of inflation–as occurred when a similar debt-clearance took place under Gerashchenko’s leadership of the CBR back in 1992. Consumer prices had already risen 43 percent in the first two weeks of September. That inflation was driven by rising import prices in the wake of the collapse of the ruble. Defenders of Gerashchenko’s actions argue that the existing money supply of rubles only accounts for less than 20 percent of Russian GDP. If the new money is used to cover transactions which would otherwise take place through barter (or not at all), then the emission might not be inflationary. But if panicky customers simply exchange rubles for dollars, the money will leak out of the economy as fast as it is pumped in.

On Friday the Central Bank had to suspend trading in dollars on the currency exchange in order to prevent an immediate flight of rubles into dollars. Earlier in the week the CBR had artificially pushed up the ruble to 7.3 to the dollar to make it easier for banks to meet loan repayments in dollar-denominated contracts which fell due on the 15th of the month. By Friday the official rate had slid to 16.4 rubles/dollar, and forward contracts for Monday placed the ruble at 18.1 to the dollar (Prime-Tass, 18 September). Tighter currency controls are undoubtedly on the way. Since September 11 exporters have been required to immediately convert 50 percent of their earnings into rubles: That requirement may soon be hiked to 75 percent (Izvestiya, September 19; Washington Post, September 16).