INSIDE FINANCE: IMF May Have to Swallow Russia's Ruble Restrictions

In May 1996, just before the presidential elections, Russia's economic reformers achieved an enormous success. Russia complied with the eighth article of the International Monetary Fund's charter by guaranteeing the convertibility of its national currency on current account operations. For the average citizen, this step meant nothing, except the beginning of hope that the "wooden" ruble they had gotten used to would someday become a respected currency, convertible around the world. If not as respected as the British pound, then at least on a level with the Portuguese escudo or the Polish zloty.


Over the past three years, the ruble went through a long period of stability and then a dramatic devaluation. Recently the ruble has come to resemble its Belarussian brother more and more.


In the beginning of April, the head of the Central Bank, Viktor Gerashchenko, signed a directive establishing a barrier between the current ruble and its former convertible self by banning foreign banks from buying hard currency from correspondent accounts. Since any operation can only be accomplished through a corresponding account, it is clear that the Central Bank has unilaterally removed the ruble from convertibility.


A number of analysts have suggested the ban on hard currency purchases by foreign banks should be viewed purely as confiscation. Moreover, since it is unlikely that a foreign bank would now want to have a corresponding account in rubles, the directive effectively acts as a ban on correspondent accounts for foreigners.


Call it what you will, the idea behind it remains the same. This regrettable path away from a freely convertible currency was already begun with the establishment of a special trading session on the Moscow Interbank Currency Exchange and the de facto creation of multiple rates of exchange for the ruble. A later step in this direction was the banning of banks from buying hard currency during special sessions to pay depositors; there are many other examples.


The decision to ban correspondent account purchases by foreign banks coincided with the arrival in Moscow of the IMF mission. During the Autumn round of talks, the IMF representatives were very much disturbed by the creation of a special trading session. At the time, Gerashchenko told them that the measure was temporary and would be discontinued as soon as it was possible. He understood that the de facto creation of multiple rates of exchange was a strong argument against the issuance of a credit.


He understands this now, too, but the situation has changed. Politics has entered into it. The war in the Balkans has reshuffled the deck. The economic and financial requirements of the IMF have lost their priority. The Central Bank and the government both know the credit will be given all the same. Therefore they can bring in the same rules and norms they would have if the IMF mission had flown back to warm Washington a half-year earlier.


Any Russian familiar with the situation, and who can do their sums, understands how much the country needs an IMF credit to pay its obligations. Without this money, default is unavoidable. This is understood in Washington as well. They understand that a default and the resulting isolation will only strengthen the position of the radical left in Russia. Judging from the rapid growth of anti-Western feeling in Russia, such an outcome is unavoidable. And because Russia's obligations to the fund and others are a thread that can be pulled, the government is scared by this. It is in its way a last bastion that somehow connects Russia to the international community.


But the separation of the IMF and the World Bank from politics always assumed that in return for their money they would require certain rules of behavior from a borrower nation. In other words, if the IMF lets pass such things as the effective refusal to meet the demands of the eighth article of its charter, than it would be more honest to say up front that the credit will be given for purely political reasons. We will help you save face and you us.


Returning to the problem of a convertible ruble, it is worth mentioning that even in a closed economy some sort of convertibility exists, provided the country imports and exports at least something. In this case, the exchange rate is determined by trade. This is how it was in the Soviet Union: The Communists sold oil on the cheap and, in exchange, bought Bulgarian and Cuban goods at inflated prices. As a result, the Soviet Union became a debtor, even to those socialist countries that lived off of its oil. This, too, was politics. But for external trade it was extremely unprofitable. It would seem that today's government would like to try it one more time.


Irina Yasina was a Central Bank spokeswoman under former Central Bank chairman Sergei Dubinin.