Financial Post G7 Record

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[Financial Post G7 Record]

Financial Post, Weekly edition, Mon 06 Apr 92, page S1. Editorial.


Aid package gives Russia a boost

The proposed US$24 billion in aid for Russia from the G-7 industrial nations is 0.2% of the group's gross domestic product. If it makes a difference in the successful transition of Russia to a democratic market economy, it will be a very worthwhile investment. It should also help create export opportunities for the G-7 countries, including Canada.

This week the International Monetary Fund commended Russia for ''launching a bold and comprehensive economic reform program'' which, if fully implemented, would ''lay the foundation for an economic program that the IMF could support with its financial resources.''

Russia must still slash further its budget deficit and slow the expansion of its money supply. Prices, including energy prices, must be fully freed to find their own level. There must be firmer guarantees of private property rights. And all the republics of the former Soviet Union must show leadership in dismantling trade barriers amongst themselves.

Of the total aid package (some details are still fuzzy) $6 billion is to be set aside to stabilize the Russian ruble. A stabilization fund is money foreign nations contribute to help a country back up its currency if it comes under attack.

This is key. The ruble must be clearly perceived as fulfilling the true function of money as a universal store of value and medium of exchange. Otherwise, an enormous proportion of resources gets wasted in hoarding and barter.

The mere existence of a stabilization fund can help inspire confidence in the currency and may not even have to be used if it is combined with responsible fiscal and monetary policy. That is what happened in Poland in January 1990 when a US$1-billion stabilization fund was set up; not a dollar of that fund was used because the reform program restored confidence in the currency.

The other $18 billion for Russia is earmarked for economic restructuring. It won't make a great material difference, but it will help ease the harsh transition to a market economy. And the vote of confidence it represents will probably help convince Russians to suffer President Boris Yeltsin's efforts longer than they might otherwise.

The more liquid the aid the better. Providing food aid has a certain appeal. But it runs the risk of slowing the emergence of Russian production. Better to give Russia hard currency which can then be used to call forth domestic production.

Ironically, Russia may have to plan its way out of a planned economy. Industries are suffering because of the shortage of key supplies. It would therefore be wise to target some of the aid to the key inputs without which whole sectors can't operate.

The export credits, which are part of Canada's contribution, should lead to more Russian purchases of Canadian goods. But without a stable currency, there won't be much business for Canada or anyone else. That's why the stabilization plan is so important. It's also important that republics introducing their own currency, as Ukraine has said it will, do so in co-operation with Russia, in a way and at a rate which doesn't further devalue the ruble.

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Revised: June 3, 1995

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