• ACI Russia

08/19/1998 10:21:20 Russia has a history of defaults this century

By Oleg Shchedrov

MOSCOW, Aug 19 (Reuters) - The Kremlin's drastic change of

currency policy this week provides yet another in a long line of

examples this century of Russian or Soviet governments raising

cash at the expense of the general public and foreign creditors.

The package made public on Monday included an effective

devaluation of the rouble, restructuring of domestic debt and a

90-day default on some foreign debts. Economic analysts predict

that the move will cause inflation to surge.

When the Bolshevik government came to power in 1917, its

initial decisions included defaulting on bonds worth tens of

millions of gold roubles which had been sold by the Tsarist

government in Europe, mainly France, during World War One to

cover the costs of waging war.

It took until 1996 for post-Soviet Russia and France to

agree that Moscow would repay 400,000 remaining creditors about

$400 million. The payments have not yet begun.

In December, 1947, Soviet dictator Josef Stalin launched a

draconian currency reform that cleaned out the pockets of

millions of people already impoverished by World War Two.

Under that reform, only a tiny percentage of savings kept in

banks were exchanged for new currency at a ratio of 1:1. The

rest was exchanged in ratios ranging between 3:2 and 10:1.

The reform was accompanied by a lifting of rationing of food

and consumer goods, which led to a sharp growth in prices.

Along with the rouble reform, the government of the day

forced virtually the entire population to spend considerable

parts of their monthly incomes to buy the government's 20-year

bonds. The campaign lasted until Stalin's death in 1953 and the

last bonds were paid off in the early 1990s.

In 1961, the then Soviet leader Nikita Khrushchev carried

out yet another 10 old roubles for one new redenomination.

Formally the event was not confiscatory, but market traders,

major competitors of half-empty state stores in supplying

foodstuff, never amended their price tags accordingly.

Soon afterwards, Khrushchev announced a dramatic raise in

official prices for meat and diary products, which amounted to a

devaluation in the Soviet system of fixed salaries and the

non-convertible currency.

Khrushchev's price hike triggered a series of protests in

Russia. The most prominent took place in 1962 in the southern

town of Novocherkassk where troops fired upon demonstrating


The decline of the Soviet empire led to more financial

turmoil, which again hit hardest at people's pockets.

By the late 1980s, accelerating rouble inflation concealed

by fixed prices emptied shelves and made the national currency

virtually useless.

In January, 1991, the then Soviet Finance Minister Valentin

Pavlov ordered a replacement of billions of roubles in 50- and

100-rouble notes.

Pavlov explained the move as necessary because mysterious

hostile forces abroad allegedly planned a massive currency

intervention. The exchange of roubles was accompanied by chaos

and surged prices.

Perhaps the biggest blow to public savings occurred in 1992

when the Russian government lifted price controls in the course

of its bold market reform. Within several weeks, prices rose 250

percent, forcing a deep plunge in living standards.

In the same year, the Russian government froze the accounts

of the state-owned Vneshekonombank, the organisation which acted

as manager of the Soviet Union's foreign debt. This forced the

government's first restructuring of foreign debt.

In 1993 the government again caused panic by giving Russians

just a few days to spend roubles printed during Soviet times

before converting to the latest version of the currency.

After the initial years of turmoil in this decade, the

Russian government has managed to stabilise national finances

and keep the rouble strong since 1995 at the expense of

developing national industries.

Monday's announcement by the government and central bank

sparked currency panic with many people rushing to exchange

booths to swap risky roubles for dollars. In one day street

exchange rates rose to over eight roubles per dollar from 6.2.

Financial stability was one of the few economic achievements

of the current government and political analysts believe the

rouble's collapse could undermine public confidence in the

government, making its task of tackline the crisis even harder.

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