Through the past three plus decades, Russia has undergone a significant change in its monetary policy. Once burdened with the remnants of a massive state-run economy that operated at a deficit in the waning years of Soviet rule, it has since transformed itself thoroughly. Reflecting this change was a development in its monetary policy, which was significantly changed. In this coursework, I made an attempt to describes how Russian monetary policy changed from its initially troubled beginnings in the 1990s to becoming an effective and powerful tool that managed to reign in the Ruble’s wild inflation rate and rid Russia of its immense foreign debt. This paper focuses on how these changes were formed in reaction to various political and economic effects, with the last part describing the current state of affairs and the goals of the country’s monetary policy.
The Russian Federation came into being following the collapse of the Soviet Union (USSR) in 1991. During the early 1990s, Russia had to undergo a series of radical economic reforms towards a liberal market economy, replacing the central planning of the Soviet era. Both fiscal and monetary policy changed significantly under new President Boris Yeltsin, in a series of extreme and rapid reforms known to historians as “shock therapy”. In the immediate years after 1991, there at first was no truly Russian (rather than Soviet) monetary authority, akin to what the Central Bank of Russia (CBR) does today. Between 1991 and 1993, Russia and many other former members of the Soviet Union still used the ruble and “conducted their own credit policy simultaneously with the Bank of Russia” (Esanov et al., 2005, p. 4). The CBR could not effectively run its own independent monetary policy. Between 1993 and 1995, the CBR began to conduct its own monetary policy, but it hinged largely on the largest obstacle the Russian economy was facing in the wake of the USSR’s dissolution — an immense decline in economic output (Esanov et al., 2005, p. 4).
Further complicating the matter was the CBR’s head at the time, Viktor Gerashchenko, a staunch old-timer communist (Watkins). Contrary to what many people believe, the period of hyperinflation that affected Russia during the 1990s was not due to the shock therapy reforms initiated in an effort to change the Stalinist command-driven economy into some version of a market economy, but rather the opposite. Geraschenko did not want a smooth transition from the Stalinist system into a Western-inspired free market, but at the same time, most (now Russian) state-owned enterprises were operating at a loss — the price of their products and services was lower than the price of the labor and material that went into producing them (Watkins). To cover the losses incurred from this inefficient mode of business, these state enterprises took loans from the CBR in order to cover the operating costs. Geraschenko was willing to provide these loans indefinitely because he was a believer in the old system, but this was unsustainable in light of Russia’s reduced economic output and its political drive to become a market economy.
The loans increased substantially over time, leading the CBR to borrow large amounts of money from the International Monetary Fund (IMF). As prices went up, the loans increased. As the loans not only added up, but also increased at an ever-more rapid pace, the amount of rubles in the economy rose at an ever-increasing speed, escalating inflation to unprecedented heights and reaching a level of 5000% per year (Watkins). On the 11th October 1994, the Russian ruble crashed and lost 24% of its value overnight in an event known as “Black Tuesday”. By the end of the year, the situation was no longer sustainable and Geraschenko had to be fired as head of the CBR.
Faced with an immediate need for cash to maintain the run of its economy, Russia needed to take large loans externally. During the early 1990s, Russia was the largest borrower of money from the IMF (Watkins). However, the IMF, as usual per its modus operandi in developing countries, would offer these loans only if Russia would promise to carry out economic reforms as dictated by the IMF and would allow its advisors to help shape the new economy (Odling-Smee, 2004, pp. 3-4). However, Russian government officials (as well as Russians collectively) felt it was humiliating to have to negotiate with the IMF on the terms of the loans, especially as the latter was imposing relatively drastic fiscal and monetary reforms. Geraschenko’s brief successor as head of CBR, a Yeltsin-affiliated reformist named Tatyana Paramanova, wanted to reorient the country’s monetary policy to counter the unsustainable inflation and succeeded in halting the hyperinflation, although the rate of inflation remained high well into the late 1990s. Paramanova also vowed to open up its banking system to foreign banks, but that was met with staunch opposition from the nascent financial oligarchs of Russia, who developed a strong lobbying abilities and were able to block her continued tenure as head of the CBR in 1995 (Johnson, 2001 p. 266). The Russian financial oligarchy would become a very strong force in the country’s political economy, influencing its monetary policy in ways to suit their business interest while funnelling money into corrupt politicians. Russian monetary policy was mired by a period of inconsistency and confusion during the latter half of the 1990s, when 3 CBR chiefs including Paramanova were appointed and then replaced in rapid succession between 1994 and 1998.
In 1995, Russia adopted a tight monetary policy in response to the high rate of inflation, and in combination with a relatively frugal budget, the government managed to reduce the rate to under 5% for the last quarter of the year. Through 1996, the rate increased again to 16.5%. The CBR made an effort to rein in the Ruble’s wildly fluctuating foreign exchange rate by maintaining it within a steady range to the U.S. Dollar. The government devoted part of its monetary policy to acquiring foreign currencies that could defend the Ruble’s value, however, this strategy was met with significant setbacks due to the Russian currency’s unstable nominal value. Throughout the mid-1990s, Russia approached its monetary policy goal of controlling inflation through questionable practices, one being the failure to pay workers in state enterprises.
The government’s monetary policy achieved some success in stabilizing the Ruble and getting inflation under control. Emboldened by the progress being made, an optimistic CBR declared a 3 year currency band on the Ruble in autumn of 1997 (Gerashchenko). However, in August 1998, the economy suffered an immense setback when the Russian financial crisis of 1998 (also known as the Ruble crisis) hit the country, forcing the CBR to default on Russia’s domestic debt (the aforementioned payment obligations to its workers) and freeze repayments on its foreign debt. The CBR and the Russian government had to make emergency changes to its monetary policy and find a direction out of the crisis.
Gerashchenko made a return as the man in charge of Russia’s monetary policy, being reinstated as head of the CBR on the 11th of September 1998 (Watkins). Perhaps now a wiser man, or seeking retribution from being named as “the worst central banker in the world” (Cassidy, 2005), Gerashchenko successfully led the country from its worst financial crisis and managed to drag the nation’s economy from a very real risk of bankruptcy. Gerashchenko himself has since stated that the major intention of the post-crisis monetary policy was “preventing the de facto default from becoming a de jure default” (Gerashchenko). To do this, Russia needed large funds from the IMF, funds that would only be allocated if Russia completely gave away to the monetary policy demands of the IMF. Although in earlier years Russia would be largely unwilling to undergo such changes in its monetary policy, it now needed the money desperately and Gerashchenko largely conceded to the IMF’s demands. The first was the need to stop all intervention in defending the Ruble and allow it to float, which was initiated in September 1998 (Yeltsin, 2012, p. 338). This saved Russia from bankruptcy, but also initiated a wave of inflation, especially felt in consumer prices (Watkins) in the last two years of the decade. The IMF also demanded a restructuring of the banking sector, but this was met with significant opposition by the financial oligarchs (Gerashchenko). Boris Yeltsin, who was the Russian Prime Minister at the time, chose Vladimir Putin as his successor.
Under Putin, Russian monetary policy entered a new phase from which it has not deviated significantly since the late 1990s. When Putin assumed power in 1999, the country was effectively bankrupt – it owed more money to the IMF than it had in foreign currency reserves. Putin established a conservative monetary policy that targeted inflation and managed to hold onto a stable exchange rate for the Ruble. This was made possible due to several favorable external factors, the most important being a resurgence in oil prices that made Russian exports much more valuable. By December 2000, Russia had no need for further loans from the IMF or from any other international creditor (Yeltsin, 2012, p. 342). Between 1999 and 2004, the Russian economy grew at a stable rate of about 6.75%, and during this period inflation remained low, the Ruble was stabilized against foreign currencies. In January 2005, Russia had paid off all of its debt obligations to the IMF, although significant debt to foreign creditors remained. Putin allowed the currency to be freely shipped in and out of Russia, and the IMF added the Russian Ruble to its list of suitable lending currencies (Yeltsin, 2012, p. 342).
The period between 1999 and 2005 is considered to be a massive turnaround for the Russian economy, and the chief difference was the significant change in monetary policies between the two eras. Between 1991 and 1999, Russian monetary policy was still largely dictated by the needs of a deficit-run state economy, requiring immense loans to maintain its functioning. Russian monetary policy focused on supporting a tightly-regulated system of state enterprises through ever increasing loans. The situation was unsustainable in the long term, and the situation unravelled hard, first in October 1994 and then again in August 1998. Further complicating the matter was the fact that the CBR’s policy was to intervene in cases where the Ruble lost value rapidly instead of letting the currency float. After 1998, the Ruble was allowed to float. The CBR tightened the conditions for loans and effectively stopped granting loans to the remaining state enterprises (towards the end of the decade, privatization had already lessened a large part of the load). A conservative monetary policy managed to turnaround the situation under Putin, but it is important to note that it was immensely aided by the rise in value of Russian exports (especially oil and natural gas).
Putin has since reneged on much of the liberalization of the financial sector. Under his rule, the CBR has completely lost its independency from the Russian government, and Putin-appointed heads of Russia’s central bank have overseen a tightening of the country’s financial sector. The deregulation of the early 2000s allowed literally hundreds of commercial banks to open up and provide loans to new businesses, but as of 2017 it is estimated that about a tenth of these business loans are made to companies that have no real economic activity. This set a dangerous precedent for fraud and would lead to serious inflation, which is the chief problem that the country’s monetary policy seeks to address. From 2004 onwards, the CBR’s new method of combating inflation included the cleaning up of such problematic banks, and over this period the number of banks has more than halved, dropping from over 1400 in 2004 to just under 700 in 2017 (Pismennaya & White, 2017)
Nowadays, monetary policy in Russia is controlled officially by the CBR, but unofficially all is in the hands of Russia’s increasingly authoritarian ruler, Vladimir Putin. Putin has stated privately and publicly that he wants to remove foreign influences from Russia, and part of his monetary policy has reflected that in the form of Russia’s commitment to repaying foreign debt. On pace with the expectations set early in Putin’s tenure, Russia paid off $ 200 billion in foreign debt through 2014 and 2015. Putin has also made the tough but ultimately effective decision to stop drawing on foreign currency reserves in order to defend the Ruble’s value, which has fluctuated immensely due to the nature of Russian exports and the recent international political situation (Sharma, 2016). Advised by technocrats rather than impulsive thinking, Putin allowed the Ruble to float freely, which caused massive inflation following the oil price crisis of 2014 and has been a source of unhappiness among ordinary Russians, but it has also prevented export (oil) revenues to collapse in Rouble terms, which is what was of crucial importance to the Russian economy. The CBR maintains on its official website that its monetary policy goals focus on preventing inflation on getting out of hand and serving the people of Russia firsthand, but the floating of the Ruble has revealed that the short-term happiness of Russians takes a back seat to the country’s macroeconomic goals.