Central Bank Still Basking in Communism

In Russia, "independence" is usually understood as the right to act with impunity and "control" as state intervention. These peculiarities of our national perception of reality were fully in evidence during the recent skirmish over the independence of the Central Bank, which led in the end to Viktor Gerashchenko's departure.

The government wanted to monitor the Central Bank's expenditures. The bank, in turn, argued that if a National Banking Council were to know exactly how much it spends on paper clips, this would spell the end of its independence.

It should be noted that the Central Bank is the only organization in this country that still lives under communism. It prints all the money it spends.

And life is good under communism. The Central Bank employs between 80,000 and 90,000 people, making it the largest national bank per capita in the world. The chairman (during Sergei Dubinin's tenure, at least) earned twice as much as his U.S. colleague, Federal Reserve Chairman Alan Greenspan. The bank spends up to $700 million each year on computer equipment and a number of expenditures are kept off the books.

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Russia's monetary base amounts to 900 billion rubles. The Central Bank spends 60 billion rubles per year, and yet bank officials are perplexed by the falling value of the ruble. The pathological professional integrity of Sergei Ignatyev, who as first deputy finance minister was buying his cigarettes wholesale to save money, could help bolster the exchange rate -- but only if he sacks half of his staff.

Another dispute has arisen over Vneshtorgbank. The Central Bank wanted to keep it under its wing, while the government wanted the bank for itself -- and for free. Central Bank control of Sberbank and Vneshtorgbank means that Russia has, in effect, a three-tier banking system. Where most countries have a central bank and commercial banks, Russia has the Central Bank, commercial banks and Sberbank.

Everyone puts their money into Sberbank because they know that if push comes to shove the Central Bank will simply print more rubles in order to pay off its depositors. Sberbank and Vneshtorgbank have failed as commercial banks; by extending loans to Gazprom to the tune of $1.5 billion in the last month and a half, both banks have demonstrated that the state is using them to launder government credits. It's clear that the Central Bank should not own Sberbank or Vneshtorgbank. They choke the banking system as burdocks in the garden choke the radishes. But it's also clear that if ownership of the burdocks are given to the government, the radishes will be wiped out.

No one has suggested breaking up the Central Bank monopoly by separating its functions of supervising the banking sector and defending the ruble exchange rate, for example. True, most central banks around the world combine these functions, but what is permissible in a civilized country can be very dangerous in a corrupt country like Russia.

As you may recall, the Central Bank received $3.8 billion from the IMF in August 1998. The money was earmarked for propping up the ruble, but was immediately dispensed to various banks in the form of stabilization loans. Those banks then transferred the money overseas, the ruble collapsed, and our foreign debt rose accordingly.

The Central Bank is a gigantic monopoly. Control of that monopoly was the central issue in the recent dispute between the Central Bank and the Kremlin. But the monopoly doesn't so much need to be controlled as it needs to be broken up.

Yulia Latynina is a journalist with ORT.