LONDON: As I follow the current fascinating discussions on India’s monetary events from London, I am reminded of a similar situation in Russia some 23 year ago.
I was working in the British Embassy in Moscow at the time and in July 1993 my wife and I decided to take a river trip on the Volga down to Astrakhan on the Black Sea. The purpose of the trip was part holiday and part work. The work element was the opportunity to talk to a large number of Russians. We were the only non-Russians on board, as we sailed serenely through the Russian countryside over a period of 10 days. It was almost two years since the tumultuous event in Moscow which led to the downfall of the Soviet Union and suddenly the Russian people were no longer afraid to talk to western diplomats. Getting their views and opinions was extremely useful in judging the progress of the country towards democracy. All went to plan until we were a few days sailing away from Volgograd, formerly Stalingrad, which was for me the highlight of the trip. Then the news bombshell hit us. It was Saturday, 24 July 1993, and there came an announcement over the boat’s tannoy that the Chairman of the Russian Central Bank, Victor Gerashenko had announced that as of 12.01am on Monday 26 July 1993 all rouble notes printed before 1993 were to be invalid. At the same time, the boat’s bursar announced that only 1993 dated roubles would be accepted on board. Panic broke out and everyone rushed back to their cabins to check the dates on their notes. Unlike modern vessels where you pay upfront for all except the drinks, it was conventional at that time on all Soviet, then Russian, boats to pay upfront only for the cabin. Food could be purchased as and when required. The implications were obvious; no new roubles, no food. Unless by good fortune you had new notes, you would be unable to feed yourself and your family. Also, as we were still one-day’s sailing from Volgograd, half of the allotted time to convert your old notes would be gone on arrival. I knew that we would be OK because the support office in the embassy always provided us with new notes, usually in thick wads, rather like small bricks, sealed by the bank to prove the number had been counted. At the time, the official exchange rate was about 1000 roubles to the dollar (two years earlier, the rate had been 1 rouble to the dollar), although the unofficial rate was several times that as the people knew that with rapid inflation in the money supply, it was far better to keep their wealth in dollars, if they could get them. Also at that time, Russia was a 100% cash economy, even more than India today. No credit cards, no cheques and no ATMs in 1993. The Russians on board knew that they were going to have to spend all their time in Volgograd standing in long queues in the hope of exchanging their old roubles on the one day left. There was a significant possibility that they would be unsuccessful and we knew that it was highly likely that we would have to feed many of the families using our new notes, which we duly did.
Why did Gerashenko make this ill-prepared announcement, as there were simply insufficient printing presses to provide the necessary quantity of new notes? He later supported his decision by saying that he had three aims: (a) to reduce inflation, by simply removing a huge number of notes in circulation; (b) by limiting the cash amount which citizens could exchange in the two-day period to 35,000 old roubles (35$), he argued that only legally earned roubles could be exchanged; and (c) the move would make counterfeiting more difficult. There was uproar over the whole country and President Boris Yeltsin sought to limit the damage by issuing a decree on 26 July which diluted the restrictions on exchange and also increased the time limit for the process. However, Yeltsin’s popularity slumped and it stayed in single figures until the 1996 presidential elections. There were many reasons for this, but one important factor was the long memory of the “rouble” affair three years earlier. He learned, almost to his cost, that you don’t upset so many people by fiddling with the currency, especially in a cash economy.
So how did Yeltsin get re-elected following the mayhem of 1993? There were two reasons for his success: (a) a Faustian pact with the Oligarchs, who controlled most of the press and therefore could put Yeltsin in the most favourable light while denigrating his rival, the communist Gennadi Zyuganov, who promised the return to the stability of the USSR; (b) he simply didn’t win. Both Prime Minister Medvedev and the charismatic Boris Nemsov, who was brutally murdered on the edge of Red Square last year, are on record, according to Time magazine, as saying the final result of a vote of 53.8% for Yeltsin was rigged.
Finally, what was the 41-year-old Vladimir Putin doing at the time of the “rouble” affair? He had resigned from the KGB in the rank of lieutenant colonel and was working for Mayor Sobchak in St Petersburg as the head of the Committee for External Relations. Four years later, he was called down to Moscow by Boris Yeltsin as the First Deputy Chief of the Presidential Staff for the regions. It is certain that he would have noted the lessons learned from the “rouble” affair and would be determined not to repeat it.
Former government employee John Dobson worked in UK Prime Minister John Major’s Office between 1995 and 1998 and is presently a consultant in the private sector.