Escape Routes from Post-Soviet Inflation and Recession

ernment exchanged 50 billion “old” rubles for 1“new” ruble in a currency reform, ceased monetizing the budget deficit, and made the ruble convertible, Lenin’s New Economic Policy began to enjoy monetary stability. Severe inflation returned, however, when ruble convertibility was abrogated and the five-year plans began in 1928. Inflation was at first open, and, as rapidly rising consumer prices overtook state-fixed wages, household real incomes were cut to make resources available for investment and defense. Inflation was soon “repressed” by state dictation of prices, which was evident in persistent shortages and an overhang (surplus) of households’ unspent money. The demands of investment, the military, the bureaucracy, and education, health, and social welfare greatly exceeded the supply of labor and natural resources, which were, in any event, used inefficiently. The Soviet Union was transformed, through forced collectivization, from being a food exporter to being unable to feed itself. The command economy limited the competitive gains that could be made from international trade. Within the former Soviet Union, price relativities bore little or no relation to the balance between the supply of and the demand for goods or services. An operational price mechanism is essential to a market system, and the governments of the successor states to the Soviet Union accepted an immediate price liberalization, designed to switch inflation from “repressed” to “open,” eliminate the money overhang, and allow foreign prices to correct domestic relativities. The Baltic countries went straight for sound and stable currencies, backed by a continuing tight monetary policy. Benefiting from a shorter experience under the command economy, as well as a thoroughgoing switch to a market system and democratic government, these countries were rewarded by proportionately more foreign support. The remaining 12 countries that were to participate in the Commonwealth of Independent States (CIS) continued to use the Soviet ruble, and had to follow Russia’s lead in January 1992 in decontrolling most retail and wholesale prices. They could not have anticipated the extent, or the persistence, of the ensuing price rise: in Russia, consumer prices rose 16-fold and producer prices rose 20-fold in 1992 alone. The following year, consumer prices in the CIS increased by 875 percent in Russia, 4,085 percent in Georgia, and 4,735 percent in Ukraine. Inflation spread through each of the 12 states and slackened only after the establishment of separate currencies.