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Primakov's Kremlin Coat of Many Colors

© Jeffrey Deutsch

It gets depressing sometimes, watching an embattled President, facing a hostile legislature and even feeling forced to admit opposition members to his Cabinet. And it's only getting worse as a movement is growing to impeach him, and his credibility is gone and he seems to have lost the power to shape events. And all this in a nuclear power, too.

Then I remind myself: at least it's not as bad as in Russia.

First things first: Premier Yevgeny Primakov has just (10/1) unveiled part of his economic package. Top priority is paying off wage and pension arrears. A draft plan by new First Deputy Premier Yuri Maslyukov, still under consideration as of this writing, proposes a fixed foreign exchange rate for the ruble, requiring special authorization for banks to import hard currency, and requiring exporters to sell 25% of their hard currency to the central bank. The exchange rate for 10/2 was set at 15.99 rubles to the dollar.

Primakov's general approach may be worth watching: he announced that the government should take a tighter grip on Russia's economy without necessarily abandoning market reforms. This announcement was during a visit with Belarusian President Alexander Lukashenka. This is important because Lukashenka has a reputation for being rationality-challenged and differently morally abled.

To start with, the Russian government is expected to reestablish a monopoly on alcohol production and wholesaling. It is expected that the revenues from that, Russia being the hard-drinking country it is, may be very helpful. Maybe.

In any case, I doubt that the currency controls, even if adopted, will do much more than light a match under the thermometer. The whole reason why the ruble is becoming a Charmin substitute is that people have lost confidence in the government. I don't just mean some foreign bankers: the population is dollarizing its economy. From previous experience, it's a sure sign that the currency is worthless and expected to remain so. Remember, a currency is only worth what people think it is worth. People don't want rubles (or dollars, for that matter) in and of themselves, they want them to trade for other items, and they will only want them so long as they believe others find them worthy of trade.

Now, fixing the ruble's rate may not be such a bad idea. If the central bank can successfully peg it to the dollar (that is, assure that X number of rubles will buy a dollar), inflation can be brought to a screeching halt. And the abovementioned vicious cycle can become a virtuous one. But trying to halt the importation of foreign currency - that's confusing the symptom with the cause, and pain medication for a cure. And pain medication can have nasty side effects.

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