View from City Road: False moves

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in Russia The Russian government was doing its best to retrieve something yesterday from the embarrassment of the monetary 'reform' announced over the weekend, by easing the terms under which pre-1993 currency is to be pulled out of circulation. But damage has already been done.

On one level, there is a simple logic to the plan. It gives more control over the domestic money supply at a time when roubles from other former Soviet republics have been awkwardly flooding back into the country. Much of this flow will be stopped. It also cuts sharply the amount of banknotes in circulation at a time when the printing presses have been working overtime.

The initial ceiling for exchanging notes was 35,000 roubles (pounds 23), roughly what a university professor earns in a month, but this was raised yesterday to 100,000 roubles.

Many Russians will be unaffected, since with such high inflation there must have been a strong incentive to spend rapidly depreciating banknotes whenever goods have been available.

The problem with tackling rouble hoarders this way is that there could be a serious blow to confidence in the rouble. It could even make Russians ever more determined to hoard dollars whenever they can get hold of the limited supplies in circulation. When they cannot, they will hoard whatever goods become available, undermining one of the key objectives of economic reform, which should be to encourage voluntary saving in roubles.

In any case, notes in circulation are not the key to Russia's monetary problems. Blame lies elsewhere, and especially with the free-flowing credit to state enterprises that can only be resolved when the government gets its spending under control.