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Russia Watch: Another Day, Another Ruble

By JOHN RYAN

Of DOW JONES NEWSWIRES

MOSCOW -- Every few years, the Russian authorities come up with a banknote reform. But unlike previous note changes, one due next year is likely to go smoothly, reflecting greater economic stability.

The Russian central bank will introduce a new 1,000 ruble ($1=RUB27.71) banknote from next year. The introduction is likely to proceed with little fanfare or even notice. That makes it somewhat remarkable in Russia's checkered history of banknote reform.

In a country known best to outsiders for its tragedies, previous banknote reforms have turned the savings of millions of people into scrap paper. Perhaps for this reason Russia is the largest holder, outside the U.S., of the roughly $500 billion in cash dollars currently in circulation.

Now rampant inflation and runaway money printing presses are thought to be a thing of the past in a Russia currently enjoying an inflation rate of just 18.8% a year and near-record central bank reserves. The argument that Russia needs the convenience of a RUB1,000 banknote worth barely $35 is hard to refute in a country where the most common savings instrument is the $100 bill.

Circumstances conspire to make the new banknote seem a good and harmless idea, yet the urge to judge according to past performance is hard to ignore.

Today no Russian or Soviet notes printed before 1997 are legal tender (though the numismatists among us will want to remember the small exception of Transdnestria, a Slavic enclave in the former Soviet republic of Moldova).

In 1998, the central bank brought in a slew of new banknotes and coins when it knocked three zeros off the ruble, turning RUB8,000, for example, into RUB8. That "dedenomination," as the central bank called it, ended up costing citizens little because the monetary authorities gave people a full year to turn in their notes and imposed no upper limit on the conversion.

While this was the only banknote reform in memory that didn't hurt Ivan Ivanovich, it did presage another monetary disaster, the August 1998 financial blowout which wiped out two thirds of the ruble's value against the dollar in a matter of weeks.

One banknote reform that still brings a shudder to small traders is the 1991 reform conducted by then-Prime Minister Valentin Pavlov, who canceled RUB50 and RUB100 banknotes and replaced them with new issues in a bid to balance the country's deficit of consumer goods with a shortage of money.

Trouble was, citizens were given just a few days to hand in their cash and they faced strict limits on how much they were allowed to exchange. A public outcry, made possible by Soviet leader Mikhail Gorbachev's policy of glasnost, led to an easing of those restrictions.

Within months of the Soviet collapse, Russia's central bank was learning on the job how to run monetary policy, introducing a RUB10,000 banknote that was 100 times bigger than the biggest note of a year earlier. In the main, it was faced with the problem of sharing a currency, the ruble, with 14 other former Soviet republics, some of which were rapidly introducing their own currency and dumping rubles where they could.

Soviet rubles from Estonia, for example, ended up in Chechnya, helping to finance and arm that republic's own bid for independence.

The chaos in Russian monetary policy was compounded by the government's freeing of most retail prices and the central bank's printing of new ruble notes.

The Yeltsin regime returned to Pavlov's methods to bring order to monetary policy. In late July 1993 it gave citizens just two weeks to hand in their money, allowing them to exchange a maximum of just RUB35,000 - then worth about $34.

Officials explained the tight deadline as necessary to hold back a flood of rubles from other former Soviet republics.