International Banking in Russia

INTERNATIONAL BANKING AND FOREIGN EXCHANGE RATES IN RUSSIA

The causes of the devaluation of the ruble as a world currency are myriad, many of them deriving from incidents that happened on or around October 11, 1994, known in International Monetary Fund circles as "Black Tuesday." On that day, the ruble lost almost 25% of its value, closing at 3.926 to the dollar, its lowest value ever. Only two days later, it recovered, climbing 20% to 2.994 to the dollar. However, the political backlash lingered long after the one-day ruble shock. The causes behind the crisis are also of far more concern than the event itself (Rose, 1998, 11).

One of the central causes of the crisis was politicking in the bureaucracy. The tight (for Russia) fiscal and monetary policies which had successfully brought inflation down to moderate levels were relaxed over the summer of 1994, when government ministers caved in to pleas for handouts from agricultural and industrial producers and the government ordered the Central Bank to issue credits amounting to an estimated 7 trillion rubles in July and August alone (Kranz, 1997, 22).

This was a short-sighted act of fiscal irresponsibility had the effect of continuing to push up inflation, which had fallen to 4% per month in August, 1994, and then increased to 10% in October. The Central Bank reacted to this inflation by allowing the ruble to adjust by dropping in value from 2 to the dollar earlier in the summer to nearly 3 to the dollar at the beginning

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appropriate responses to the crisis. This gives rise to an "incompetence theory," encompassing both Mr. Yeltsin and Mr. Gerashchenko, who, for all their posturing, probably did not know enough about the proper regulation of currency markets to place any blame for the ruble's fall alone (Kranz,1997, 22). Still another theory travelling through Russian financial circles was that the ruble's continuing drop was caused by a conspiracy of special interest groups, sometimes referred to as the "conspiracy theory." Parliamentarians believed that the crisis was engineered by, alternatively, the banks, the government, oil exporters, or Western spies. These beliefs hearken back to the old Soviet days when disasters of one sort or another were inevitably blamed on the enemy. Mr. Yeltsin also seemed to subscribe to this theory and even organized in 1996 a committee comprised of his National Security Council and the secret police to investigate the decline. He and others believed that conservative ministers conspired to discredit the reform process. The reforms were misguided and misinformed, and it was not until August, 1998, when Yeltsin announced that the ruble would not be devalued again, and less than three weeks later, the prime

Category: Economics - I