Fixing Russia's Banks


There are more U.S. dollars under mattresses in russia today than the total value of all ruble deposits in russian banks. This fact highlights the failure of the Russian governemnt to fosture the establishment of real banks that would fulfill the findamental role of banks everywherefinancing production by mobilizing household savings and lending them to productive enterprises.

Fixing Russia's Banks documents how Russia's financial system is built on what Michael S. Bernstam and Alvin Rabushka call ersatz banks. These inferior initation banks have served largely as tools of the government to redistribute public funds to favored firms. The highly vaunted achievements of privatization, removal of price controls, and foreign trade liberalization have failed to produce growth because of a lack of private financing. National income has declined nearly 40 percent since 1992, with no recovery in sight.

Bernstam and Rabushka have painstakingly reconstructed the balance sheets of Russia's commercial banks to show that the banking system has been collectively insolvent since 1991. Russian banks have been kept afloat by injections of inflationary credit, by preferred sales of high-interest bonds, and by slaes of shares in state-owned natural resource firms to the banks at bargain basement prices for final resale to foreigners.

Failing to fix Russia's banks risks further economic stagnation or decline and financial catastrophe. Bernstam and Rabushka's bold, intriguing, provocative proposalresting on an elaborate strategy of debt-for-equity swapswould fix the banks, reduce government debt, strengthen the independence of the Central Bank, and lay a solid foundation for sustained economic growth.