Russia and the Republics: Approaching Chaos
Jude Wanniski
December 3, 1991


As you have seen reported, the Yeltsin Government has decided to float the ruble on January 1. The tourist rate was floated today and immediately climbed to 100 to the dollar from 47. This also means price controls will be lifted in Moscow on December 15, and on January 1 in the rest of the remnants of the USSR now under the control (such as it is) of the Russian Republic. There is one chance left that Boris Yeltsin can be persuaded to postpone this catastrophic step, which the government's western advisors, chiefly Jacques Attali of the European Bank for Reconstruction and Development and the IMF economists, believe will stabilize the ruble, but which will instead cause it to lose all its value. All. Unlike hyperinflations that occur in countries with functioning banking systems and private capital assets, the result in Russia is that all money commerce will cease, and as government will have nothing to tax, government will have to cease as well. There will be no money to pay the army. The potential for cataclysm in this darkest of scenarios should be evident to all. President Mikhail Gorbachev sounded exactly the right doomsday note today, predicting war if the Ukraine does split away completely from the union, as it would have to do if the ruble is floated. Rumors of another coup swirl through Moscow. It's especially ironic that Attali is behind this; his recent book "Millenium" predicts the rise of Europe amidst the collapse of both the Soviet Union and the United States. Attali was recently quoted in The Wall Street Journal as describing the EBRD as "one third World Bank and two thirds Lazard Freres."

At the last hour, Polyconomics has been invited by the Russian Republic to come to Moscow and make an alternative presentation, on our longstanding idea of fixing the ruble instead of floating it. At the moment, there is a good possibility I'll be going to Moscow this coming Sunday with a small group I've assembled. The invitation was generated, I think, from those officials in the Yeltsin Government who are alarmed at the dangers facing the country in this monetary leap into the unknown. The invitation specifically came to me from the Deputy Minister of Economics, I.S. Materov, on behalf of the Minister, Yegor Gaidar, who is also a Deputy Prime Minister and now President Yeltsin's chief advisor on economic policy. The invitation grew out of the proposals I'd made to the Gorbachev Government in April 1990 and April of this year, to stabilize the financial system with a gold ruble guarantee. The project I contemplated involved a partnership with the WEFA Group of Bala Cynwyd, Pa., and would require several months of planning and preparation for even the first stage of the program. William Mundell, chief executive officer of the WEFA Group, is part of the group going to Moscow. In addition, Prof. Reuven Brenner of McGill University in Montreal, a world class economist who shares our alarm at Moscow's present course, has agreed to join the team. Dr. Brenner has recently been through the Soviet Union and believes, as he put it to me yesterday, "the floating of the ruble is completely unacceptable."

At the very least, we would hope to persuade the Yeltsin Government to postpone the monetary and price decisions already announced. Indeed, I advised Deputy Minister Materov last week that we would only consider coming prior to the ruble floating, as there would be no point in coming after the float. They would have to find others to sweep up the debris. Undersecretary of State Robert Zoellick knows exactly what is at stake. He's quoted in the Los Angeles Times, 11-25: "The worst case-scenario would be that you have inter-ethnic strife in the republics; that you could lose control of nuclear weapons; that you could have large conventional armies at war with one another; that disruptions in the economy could reduce supply of basic needs -- you could have mass migration. It could get pretty messy."

As the clock ticks away, the situation bears closer and closer attention. Anything close to this worst case scenario would roil the global financial markets, as it is hard to imagine the 300 million people involved in the catastrophe being so polite as to keep things to themselves. The German financial markets and the Deutschemark especially would be hit with the heaviest weather. We got just a small whiff of this last week when the Soviet Government approached bankruptcy, a crisis averted when the Russian Republic advanced the credits necessary to pay the government's bills. If the ruble floats, there will be nothing to stop it from spiraling out of control, a la Germany in 1921-22. I remain convinced the crisis could be punctured at the last minute with a Plan of Action to make the ruble convertible. Following is a draft version of the Plan I sketched out November 22 and circulated to our small group soon after I heard from the Yeltsin Government. Refinements are coming in. We would be pleased to have your comments, especially random strokes of genius. We will keep you informed.