Russia offered nought for its comfort

Success in the fight against inflation had made possible a reform which would relieve Russians of the need to carry wads of roubles to make the simplest purchases, President Boris Yeltsin said yesterday.

Showing he had learnt from past mistakes, when such reforms caused panic and amounted to a confiscation of savings, he gave five months' notice of the change and said that even after new rouble notes were introduced on 1 January the old ones would be valid until 2002.

"Today we reliably control money circulation and control inflation," he said in an address to the nation as he ended his summer holiday and prepared to resume work in Moscow today. "The prices of basic goods are practically stable. That is why we made the decision to conduct the money reform." Thanks to a tight budgetary policy on which reformers have insisted and in spite of howls of protest from the Communist opposition, Russia has seen a miracle over inflation, which rocketed when prices were first freed in 1992 until 1996, when it fell to 22 per cent. This year it is 12 per cent.

Under the reform, one new rouble will be worth 1,000 old ones. Until the end of 1998 shoppers can still use old notes, simply knocking off three noughts. For another three full years after that the old notes will be accepted for exchange by the banks.

"Nobody will lose anything as a result of this reform," Mr Yeltsin said. "Nobody's interests will be harmed. This reform will not be a confiscation." Russians have not forgotten the summer of 1993, when the government announced it was withdrawing certain denominations of the rouble and gave the population only a few days to change their money. Pensioners had heart attacks in the huge queues which built up outside banks and many, unable to make the transaction in time, lost their life's savings.

This time the more competent hands of Anatoly Chubais and Boris Nemtsov, the new reformers now surrounding Mr Yeltsin, are evident. "We will gradually replace the old money with new," said the President. "The standard unit will be one rouble. It will be easier, more familiar, without all the extra zeros. New zeros will never again appear on our banknotes."

Geoff Winestock, editor of the Moscow Times and an expert on the economy, said the reform was largely cosmetic, designed to make Russians feel they had a real currency instead of Monopoly money. At present, they must carry a sackful of cash just to buy bread at 2,500 roubles a loaf or vodka at 18,000; the rouble has limited convertibility at a rate of 5,800 to one US dollar.

"Everything depends on how the government runs the economy from now on," said Mr Winestock. "After what Mr Yeltsin has said, it will be very embarrassing for them to have to add more zeros to the rouble, so in a sense this is a bit more than a public-relations exercise. It is a way of forcing themselves to be honest."

Overall, the economy is still not healthy. The pension backlog has been cleared but the government is having to auction state property to meet obligations to the army and the massed ranks of unpaid doctors, teachers and other public workers. Compared with Soviet times, Russian shops are bursting with goods to satisfy the consumer but they are mainly imports. Domestic industry is on its knees and unemployment is far higher than statistics show.

Money madness

The Russian government is by no means the first to try the trick of knocking off a few zeroes, writes Margaret Rogerson. Brazil, Argentina, Yugoslavia and many others confronted with hyperinflation have tried the same tactic.

In an effort to curb inflation, the Reichsbank in Weimar Germany issued a new mark - each one worth a trillion old marks - to save Germans from taking a wheelbarrow of money to the shops: in November 1923 a loaf of bread cost over 200 billion marks; a construction worker was paid 3 trillion marks a day.

The world's worst inflation occurred in Hungary in 1946 when the 1931 gold pengo was valued at 130 million trillion paper pengos. Notes were issued for "egymilliard billion" - 10 with 21 noughts after it - on 3 June and withdrawn on 11 July.