Monetary Policy in Russia

• Author: Tomás J.T. Baliño
• Position: Assistant Director in the Monetary Operations Division of the IMF's Monetary and Exchange Affairs Department

Over the last few years, Russia has succeeded in developing the tools to carry out an effective monetary policy in a market economy. What monetary policy instruments has the central bank used to achieve this objective, and what lessons has it learned in the process?

Russia became independent at the end of 1991, when the Soviet Union dissolved into 15 states. Thus, it had not only to adapt institutions to new political realities but also to transform a centrally planned economy into a market economy. In the Soviet era, monetary policy simply accommodated the plan's decisions on resource allocation and pricing. In the emerging market economy, however, monetary policy had to be geared toward attaining price stability while allowing the market to play the major role in allocating resources.

Changing the role of monetary policy required a major effort. The public and officials at many levels of government had to be educated about what that role should be in a market economy. Moreover, the monetary institutions (central bank, commercial banks, and monetary instruments) had to be established or adapted at the same time that the economy had to be stabilized and had to adjust to market realities and the collapse of the Soviet state.

The Soviet Union's monetary policy

Monetary policy had two main roles in the Soviet Union: ensuring the fulfillment of the economic plan and controlling households' purchasing power. The economic plan defined how much of each good had to be produced and set its price. It served as the basis for the credit plan, which assigned earmarked credits to each producer. The credit plan flows thus served as a tool to monitor the economic plan's execution. Lending rates were administratively fixed, and investment funds were allocated by the branch ministries. Enterprises paid each other using bank transfers and could use cash only to pay wages and salaries. Their deposit balances could be used only for the purposes specified in the credit plan.

By controlling households' purchasing power, the authorities sought to avoid queues and shortages. Because cash was the only form of payment outside the plan's control, monetary policy focused on targeting the amount of cash in circulation. A cash plan established how much currency the Gosbank-the controlling institution in the Soviet Union's banking system-would issue and the sums to be allocated to enterprises to pay wages and salaries. Households could hold liquid funds either in cash or in savings deposits. Interest rates were low and were rarely changed. The government issued bonds sporadically, and the amounts placed were small, owing to their low and uncertain yields and frequent suspension of debt servicing.

The Gosbank issued currency, cleared interenterprise payments, and formulated and executed both the credit and the cash plans. It also financed the budget deficit. Thus, it was a hybrid institution, carrying out functions that in market economies are split between the central bank and commercial banks. In addition, the Soviet banking system comprised the Savings Bank, which mobilized household savings, and several specialized banks. The Gosbank tightly controlled specialized banks, setting ceilings on their credits and providing most of their funding. Soviet financial arrangements also included a foreign exchange plan. The ruble was nonconvertible. The exchange rate was set administratively, and a system of subsidies and taxes offset differences between export prices and domestic prices.

Further reforms took place in 1990 and 1991. The Gosbank remained as the central bank of the Soviet Union, to which the central banks of the various republics, including Russia, were made subordinate. However, political developments in 1991 made Russia's central bank practically independent of the Gosbank; there were now two de facto monetary authorities in Russia.

Monetary policy in the ruble area

Poorly designed monetary arrangements following the collapse of the Soviet Union impeded an effective monetary policy. The...