TIME: Almanac 1993/TIME Almanac 1993.iso/time/110689/p52

Text File | 1992-09-23 | 6.3 KB | 126 lines

                                                                                WORLD, Page 52

Now It's More Like Real Money


The ruble is cut down to size  -- but may have to be cut more

By Ricahrd Hornick/With reporting by Paul Hofheinz/Moscow


    U.S. DOLLAR-SOVIET RUBLE EXCHANGE RATES:

    OFFICIAL RATE: $1 = 0.6 rubles. This arbitrarily determined
level overvalues the ruble and hampers East-West trade.

    SPECIAL RATE: $1 = 6 rubles. The new, more realistic rate
will be available for travelers and business people.

    BLACK MARKET RATE: $1 = 15 rubles*. This thriving sector
diverts sought-after foreign cash from government coffers
*A year ago, the level was five rubles.

    Among superpower currencies, the Soviet ruble gets no
respect. Its official value is so overstated after decades of
isolation from the market place that even Soviet citizens treat
it as funny money. In the past year Soviet economists have
openly acknowledged that the ruble's official rate of exchange
with Western currencies was seriously out of whack. While the
Soviet state bank, Gosbank, gave visiting foreigners only 0.65
rubles for every U.S. dollar, a thriving black market offered
as much as 15 rubles. An internal study done for the Central
Committee of the Soviet Communist Party reportedly estimated the
ruble's true value to be as low as 20 to the dollar.

    The Politburo, giving it self plenty of time to reconcile
the currency with reality, voted a year ago to begin "steps to
ensure the ruble's convertibility" by the year 2000. So
Sovietologists in the West were caught by surprise last week
when Gosbank announced that it would devalue the Soviet currency
90% for transactions that do not involve imports or exports.
Foreign visitors will get much more bang for their buck: 6.26
rubles per dollar. But Soviet citizens traveling abroad will
receive a paltry 16 cents per ruble instead of the official
$1.60, which will seriously hamper their ability to go on
shopping trips abroad for scarce consumer goods.

    Last week's move was just a small step toward making the
ruble freely convertible to other currencies, a process that
will have to be done gradually over many years to prevent
disruptions in the Soviet Union's economy. The ruble's
nonconvertibility has been a major barrier to East-West joint
ventures.

    Western visitors will not reap many bargains from last
week's step, which in practical terms will apply to a small
portion of transactions. Tourists are generally asked to pay in
foreign currency for lodging, transit and food. And as Soviet
citizens know painfully well, the ruble is virtually worthless
in the domestic economy. Moscow cabbies speed past hapless
hailers unless they hold up something more enticing: a greenback
or a pack of Marlboro cigarettes.

    One reason Soviets have little use for their own currency
is the shortage of consumer goods to buy. The result is that the
goods have become the storehouse of value rather than the money,
as in hyperinflationary economies. A leading Soviet economic
official told a visiting American that his neighbor had a
seven-year supply of detergent in his tiny apartment.

    More important, the Soviet Union has a glut of cash, a
so-called monetary overhang, which has ballooned under Mikhail
Gorbachev because the Soviet government has run increasingly
large budget deficits to maintain social peace by subsidizing
prices for essential goods and services. The government prints
more money to cover the gap, which in a free-market economy
would increase inflation. But under the severe price controls
of a command economy, the money has no place to go but under the
mattress. Jan Vanous, research director of PlanEcon, a
Washington-based consulting firm, estimates that by the end of
1989 the store of unspent, readily available money will exceed
460 billion rubles, at least a third of which would be spent
immediately if goods were on hand.

    Soviet officials are concentrating on how to reduce the
monetary overhang before it turns into a pent-up avalanche of
hyperinflation. The official Soviet plan for next year is to
increase by 20% the production of durable consumer goods and to
triple the output of such goods as washing machines, vacuum
cleaners and VCRs. But few Soviet economists believe this plan
can succeed.

    The Soviets suffer no shortage of outside advice. The most
radical solution proffered by visiting scholars and bureaucrats
is a massive currency reform, similar to the program carried out
in Germany in 1948, when the authorities by fiat eliminated 90%
of the citizens' cash holdings. Soviet officials reportedly fear
that such a solution would destroy the public's minimal
remaining confidence in Gorbachev's efforts at economic
restructuring, or perestroika. Likewise, proposals to increase
radically the prices of consumer goods, to bring them into line
with free-market levels, run the risk of popular unrest because
more than 41 million Soviets are already living below the
poverty line. Notes a Western diplomat in Moscow: "They're
terrified of price reform." Hoping to avoid such measures, the
Soviets listen to all suggestions. Federal Reserve Board member
Wayne Angell received an appreciative hearing last summer when
he suggested that the solution to the overhang was to back the
ruble with the country's huge gold reserves. Aside from
technical problems, the plan may underestimate the average
Soviet citizen's skepticism. As one Muscovite told the New York
Times, "Even if they said the ruble was now backed by diamonds,
I wouldn't trust them."

    But Gorbachev's economic team is growing bolder. Last
week's devaluation was aimed primarily at challenging the black
market. Explained Valeri Pekshev, deputy chairman of Gosbank:
"Foreign currency was accumulating in the pockets of shady types
rather than in the coffers of state banks." According to
PlanEcon's Vanous, the Soviets plan to cut the official exchange
rate in half next year for exporting companies. The goal is to
reach one unified, rational rate to replace the current
hodgepodge of official and negotiated rates. But in spite of
such encouraging moves, true convertibility is not much closer
than it was a week ago. Until the Kremlin can inspire domestic
confidence in the ruble, Gorbachev's perestroika is seriously
at risk.