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
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
In January, 1991, the then Soviet Finance Minister Valentin
Pavlov ordered a replacement of billions of roubles in 50- and
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.