TIME: Almanac 1995

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<text id=89TT2901> <title> Nov. 06, 1989: Now It's More Like Real Money </title> <history> TIME--The Weekly Newsmagazine--1989 Nov. 06, 1989 The Big Break </history> <article> <source>Time Magazine</source> <hdr> WORLD, Page 52 Now It's More Like Real Money </hdr><body> 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 (A year ago, the level was five rubles). This thriving sector diverts sought-after foreign cash from government coffers. 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. </body></article> </text>