†††††††††††††††††††††††††††††††††††††††††† †BACK† TO† THE† FUTURE
††††††††††††††††††††††††††††††††††††††††††††††††††††††††††††† ††††††††††††††††††††††††††††† by Michael Hammerschlag†††† Sept 98
††† Nothing at this point could be worse for Russia than the appointment of Victor Gerashchenko to head the Central Bank. As head of the Central Bank from 89-94 (with a half year break after SU collapsed), Gerashchenko violated the most elemental responsibility to protect the value of the ruble. According to economist Jeffrey Sachs, ďHe's the "worst central bank governor in history" and "economically illiterate". Over '92-94, he issued trillions and trillions of rubles to pay the reckless debts of industry- inflating the money supply and crushing the ruble from 32R/$1 to 1200/$ in a little over 2 years. Ignorant of simple economic principles, he took his most important task as sustaining the clunky massive industries; and impeded, resisted, and sabotaged reformers at every step. In July '93, with the President and Finance Minister out of town, Gerashchenko "invalidated" old money: people had 3 days to convert old rubles to new ones; creating an absolute panic. Allegedly to "reduce the money supply", prevent an influx of rubles from independent CIS, and break the bank of the Mafia; it still was an outrageous and criminal act. He had done it before in '91. Again and again we marveled at his durability: though everyone agreed he was destroying the economy, he seemed unfirable, perhaps because he knew where the secret Swiss bank accounts lay. Understandably, to Communist managers that controlled everything, just letting companies be was harder than breaking a heroin habit; massive industries were almost the only industries and allowing them to collapse was anathema.
†††† But Gerashchenko's incompetence was still dazzling. He seemed to have no understanding of the connection between printing trillions of unsupported rubles and their continued devaluation. And the devaluation was breathtaking: 26-fold at the end of '92, 400-fold by the end of '93, and about 2000-fold by 94 (though wages also increased). Sachs then criticized his "profoundly Soviet view of money: he sees it not as a store of value, but merely as a unit of account". For 4 years, protected by entrenched friendships between neo-communist bureaucrats and support from the DUMA, he resisted all efforts to remove him. Finally when he provoked a 30% drop in the ruble on Black Tuesday in Oct '94, Gerashchenko was sacked for his deputy- respected Tatiana Paramonova, who lasted a year. She was just reappointed as his deputy, the only good news in the mess.
†††† As Russia essentially nationalizes collapsing banks (who recklessly speculated in the artificial stock market), Communists take their place in government (Dep Prime Minister for economic strategy Maslyukov), and spy chiefs reign supreme; it's like the clock is rolling back 7 years. Dep. Prime Minister Shokhin and Gerashchenko are oil and water- it's hard to see how they'd agree on anything. After protesting against the wild printing of money, Shokhin just resigned, allegedly because liberal Zadornov (who had supposedly provoked the Aug 17 ruble collapse) was confirmed as finance minister, but there's a long tradition in Russia of resigning before imminent disasters. Shokhin was the only reformer left who has the confidence of the IMF and Western investors, which increases their reluctance to render any massive assistance.
††† Gerashchenko probably did as much to damage Russia and reforms as anyone else in the last 8 years, much intentionally for political advantage. Although inconceivable to a Westerner, itís possible the Communists want a complete economic collapse; thatís how they came to power before: itís even in their playbook. Although the chronic nonpayment of wages is a terrible thing, destroying the ruble is worse. Unless quickly purged, Victor will print hundreds of billions of rubles, again making them worthless and setting loose the rabid beast inflation. He's planning to issue 40-50 billion R, and claims pressure to issue 120 billion, which even the central bank admits will cause 300-450% inflation. In '91-3, Russia was still mostly self-sufficient, sealed and insulated from the world, so inflationary changes happened slowly (although in lurches). Now that Russia is plugged into the world economy and dependent on imports for virtually everything, reckless issuance of currency will have an immediate and devastating result. And if it is cast adrift by a gun-shy and economically shaky world, in the short term it canít sustain itself.
Michael Hammerschlag wrote commentary essays for Moscow News, Moscow Guardian, Moscow Tribune, Providence Journal, + Seattle Times; and lived in SU/Russia from '91-'94.