Decree on Ruble Recall Destabilizing for International Businesses in Russia

[Deb Palmieri on Russia Table of Contents]

The following article was published in the Russian Commerce News, Fall 1993. The Russian Commerce News is the official publication of The Russian-American Chamber of Commerce®.

Decree on Ruble Recall Destabilizing for International Businesses in Russia. . . . But Let's Give Russia a Chance!

July 24 was not a good day for the Russians. A decree had been announced by the Central Bank that all rubles issued before 1993 would soon be invalidated. It was shock therapy at its worst. Citizens could exchange a maximum of 35,000R for new bills and could only convert higher amounts by locking them in 6-month savings certificates at an unannounced interest rate. Panic, confusion, and hysteria mounted as people rushed back from summer vacations to frantically crowd into long bank lines clutching wads of rubles.

Angry accusations were pointed at any official in high public office. As Central Bank Chair, Viktor Gerashenko was directly responsible. Yeltsin was vacationing at the time and returning to Moscow under intense fire, eased several features of the decree. Finance Minister Boris Fyodorov, then in Washington, appeared to be out of the decision loop. Prime Minister Viktor Chernomyrdin endorsed the Bank's action and in fact announced it to his ministers in a cabinet meeting the night before the announcement. Opposition Parliamentary Speaker Ruslan Khasbulatov seized the moment to condemn the decree, order it dismantled and criticize the Yeltsin administration.

Since then, speculation runs rampant as to the why's, who's and when's of the latest turmoil shaking the foundations of Russia's government. While we will probably never know for certain "who dun it," what the international business community does know beyond a shadow of doubt is that the affair has damaged the credibility of Yeltsin's government to insure currency stabilization, a most vital factor in a successful reform process. The fiasco underlines how political instability and infighting threaten to disrupt economic growth rates and productivity. It seriously jeopardizes Western confidence in delivering the promised $44bn aid package. Foreign investors and businesses face yet another set of new uncertainties, unexpected obligations and obstacles, as if there aren't enough already. Russian leaders appear uncoordinated, out of control, with little communication among their own leaders. The West wonders about Russia's capacity to effectively set and implement economic reform policy and maintain domestic and international credibility at the same time.

Yet there is a glimmer of hope. The good thing was that officials were trying to control the money supply and hence create a stable currency and curb inflation (a result of an earlier hemorrhage of ruble notes in circulation which in turn skyrocketed inflation rates.) The bad thing was the way it was done. To achieve a noble objective, officials exhibited poor judgment by implementing a severe, abrupt measure that caused yet another disaster for the already crisis-ridden and increasingly skeptical Russians. It also left Westerners skittish about whether they themselves exercised sound judgment in conducting business under such circumstances.

But let's face it. Currency stabilization and reform is a complex and protracted problem. There are no easy answers and despite the fact that everyone wants change and they want it now, it just won't happen that way. The Russians are doing the best they can under extremely difficult circumstances and a little moral support from the West wouldn't hurt. Let's also remember that political dramas in Moscow have varying effects on actual business operations there and in outlying regions -- to a greater or lesser degree depending on a whole host of factors -- political and business contacts in the local community, the type of operation, reliance on official vs. informal channels and so on.

The Russians need time to make the monumental changes necessary to transform their system. They are bound to make some errors. The international business community should urge Russia to stabilize its finances but through more coordinated, less draconian methods. Russian officials should cast aside strategic and tactical differences to depoliticize currency issues, design a workable economic and currency stabilization plan, and set Russia on a course to guarantee both democracy and successful economic development.

Deborah Anne Palmieri
Russian Commerce News, Fall 1993