Since 1897, the ruble has been on the international gold standard, and stable. Russia's industrialization requires substantial foreign investment. Ruthless tax levies and high tariffs on imports of industrial products aim to protect Russia's infant industries and help balance the budget. Foreign investment soars, and by 1913 an estimated one-third of all capital in Russia is foreign owned.
Russia's state debt has increased so dramatically prior to WWI, the country has become the greatest international debtor in the world. During the war, taxes are hard to collect, and the government is forced to print more paper money and float its loans domestically and abroad. The cornerstone of Russian financial policy, the gold standard, is abandoned, and the ruble is undermined by inflation.
With the October 1917 revolution, the Marxist concept of the moneyless economy becomes a desired goal, but not yet a practical one. The Bolsheviks nationalize the banks, but make no attempt to restrict inflation. With the destruction of the market economy, inflation soars, and money becomes virtually valueless. A black market based on barter develops to fill the vacuum.
In order to make the market elements of the New Economic Policy (NEP) work, a stable currency is needed. The State Bank reopens and is empowered to issue a new ruble, the chervonets, backed by gold reserves and a balanced state budget. A money market and stock exchange revive alongside the new money.
The banking system is owned and managed by the government. Gosbank is the USSR's Central Bank and its only commercial bank. The ruble is an almost entirely internal currency unit, with the government fixing its rate of exchange with foreign currencies somewhat arbitrarily. Without a market economy, prices are set by the State Committee on Prices, and the real value of the ruble is difficult to determine.
A currency reform that makes 10 old rubles equivalent to one new ruble in 1947 attempts to replace the inflated money of the war years with a firmer currency. As was its intention, it deals a severe blow to the flourishing black market, but also sharply reduces the value of people's savings not kept in a bank.
Following the oil crisis, from 1973 to 1985 energy exports account for 80 percent of the USSR's expanding hard-currency earnings. By the late '70s up to 40 percent of hard currency in foreign trade is being spent on increasing agricultural imports to maintain the informal social contract with the people: low pay in return for cheap food.
World oil prices plummet by 69 percent, and the dollar, the currency of the oil trade, drops like a stone. Almost overnight, the windfall oil and dollar profits the USSR has enjoyed for more than a decade are wiped out.
Gorbachev's reforms force state enterprises to rely to a greater extent on their own financial resources rather than on the central budget. Several new banks are set up to finance industrial undertakings, ending the monopoly of Gosbank. By 1989 inflation begins to make a major impact as goods grow ever more scarce. In 1987 checking accounts begin for personal savings accounts.
The budget deficit exceeds 20 percent of estimated GDP. Soviet foreign debt balloons to $56.5bn at a time when the ruble is undergoing steep devaluation. Capital continues to flee the USSR, and Soviet gold reserves and foreign currency accounts disappear never to be found.
The Soviet state bank is replaced by 15 republic central banks. The ruble is retained in the belief that a single-ruble zone will promote economic reintegration. By 1993 many CIS states create their own currencies. Russia ends Soviet price controls, but monetary stabilization proves elusive. To prevent enterprises going bankrupt, the state prints money. In 1992 inflation reaches 2,323 percent.
Despite having sold off much of its industry, the Russian government finds itself virtually bankrupt. High rates of taxation serve only to drive businesses into systematic tax evasion. To cover its persistent deficits, the Treasury issues bonds (GKOs) at very high rates of interest. They help keep the government temporarily afloat and allow it to persuade the IMF it is solvent and deserves loans.
The aftershock of the Asian economic crisis hits Russia. With commodity prices tumbling, Russia, a major commodity export earner, sees its revenues plummet. Unable to fund its soaring GKO obligations despite a large IMF loan, the government defaults on its debts. Overnight most of Moscow's large banks go bust. The ruble declines to less than a third of its previous exchange rate.
Helped by rising commodity prices and the 1998 ruble devaluation, Russia's foreign exchange reserves rise, and the ruble strengthens. A major reform that cuts tax from a progressive rate up to 30 percent to a flat rate of 13 percent aims to simplify and boost tax collection and stimulate consumer spending. Russians begin to buy and use euros alongside dollars as a safe foreign currency.
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