Encyclopedia of Money: Yeltsin’s Monetary Reform in Russia

Russia opened the 1990s in monetary chaos, manifested by soaring inflation, and a currency, the ruble, that had long been shielded from the free-market forces of foreign exchange markets. In foreign exchange markets, currencies are bought and sold with other currencies, as when Japanese yen are purchased with United States dollars.

Under economic reforms, prices, unfettered from state controls, took off, creating a ruble shortage that left some workers unpaid for months. Wages and pensions rose, and the Russian government cranked up the printing presses on a round-the-clock basis. For the month of July 1992 alone, the government printed up more rubles than the Soviet Union government had printed up in its last 30 years. To expedite the process, the government increased the largest denomination of the printed ruble from the 200-ruble note to the 1,000-ruble note. Coins also became available in higher denominations. Inflation reached its peak in 1992 when monthly inflation rates ran 15 percent, and prices increased 200 percent over the year.

In 1993 the government begin to step on the monetary brakes, but in ways that threw the country into deeper confusion. In July the government invalidated all rubles issued before 1993, and gave people only a few days to convert the old rubles into new rubles. It also put a limit on the number of old rubles that foreigners could convert into new rubles. Citizens could convert up to 35,000 old rubles into new rubles, and if they held additional rubles, these had to be put into savings accounts for six months. By the end of 1997 annual inflation had fallen to the 12 percent range, and the government announced a plan to lop off three zeros from the ruble. Effective 1 January 1998, in what was essentially an accounting reform, 1,000 rubles became 1 ruble, and all prices, balance sheets, debts, etc., were adjusted accordingly.

One legacy of the Soviet regime was tight control over the conversion of rubles into foreign currencies. Tourists were able to convert foreign currencies into rubles at a rate close to a black market rate, but set by the Russian Central Bank. Foreign-owned enterprises earning profits in rubles faced a special difficulty. If a foreign-owned company wanted to send profits home to the parent company, those profits had first to be converted from rubles to the home-country currency at a disadvantageous exchange rate set by the Russian government. To attract foreign investment, and integrate the Russian economy into the world economy, Russia had to make the ruble convertible into foreign currencies at free-market rates.

A loan from the International Monetary Fund helped the Russian government marshal the foreign exchange reserves needed to establish a convertible ruble. On 1 July 1992 the Russian government established a single exchange rate between the dollar and the ruble at an initial rate of 126.5 rubles per dollar. The responsibility for adjusting the rate fell to the Russian Central Bank, which planned to set a rate based upon twice-weekly currency auctions. After July 1993 the Russian Central Bank pegged the ruble to the dollar in a crawling peg system that avoided wild fluctuations but allowed the ruble to depreciate over time relative to the dollar. In 1996 Russia further broadened the ruble market by allowing foreigners to buy and sell Russian government bonds in secondary markets. Russian government bonds, paying over 100 percent interest at times, constitute a major demand for rubles. Rubles must be purchased first before bonds can be purchased. The astronomical interest rates on Russian bonds were sometimes necessary to maintain a demand for Russian rubles. Despite high Russian interest rates, the ruble steadily declined relative to the dollar, falling to a rate of 6,200 rubles per dollar at the end of 1997. After three zeros were lopped off, the rate became 6.2 rubles per dollar.

In 1998 the Russian government again turned to the printing press to solve Russia’s problems, putting pressure on the ruble in foreign exchange markets. The value of the ruble fell sharply in august, and to help cope with the crisis the government imposed a moratorium on payments on foreign debt, significantly adding to the severity of a global financial crisis. By the end of the year the ruble was trading at around 20 rubles per dollar.