America Abroad

By Strobe Talbott

How to rescue the people of the former Soviet Union from the economic abyss? It is a question of money, obviously, but not of how much we should give them. The most important task is to help them develop real money of their own.

In a normal country, currency is more than just a medium of exchange between a buyer and a seller: a dollar bill or a thousand-yen note is a contract between the individual and the state. The citizen does his part by producing and consuming, while the government ensures what economists call a stable standard of value -- a sound currency -- for the transactions of life.

Money must be versatile. It can be used to purchase goods and services at rates determined by the laws of supply and demand. Or it can be saved for moments of need or retirement. Or it can be converted into the currency of other countries. In this way, money both reinforces national identity and stimulates international commerce.

The Soviet Union, however, was a very abnormal country. Genuine money did not exist. Instead, the state issued little pieces of paper like scrip redeemable only at the company store, or like the play money used in Monopoly, with the Kremlin making all the rules. Those rules had nothing to do with basic economics. What was in supply had little to do with what was in demand, and prices had little to do with the cost of production. Too many rubles chased too few goods, and too many citizens spent too much time in lines.

The social compact was a joke: "We pretend to work; they pretend to pay us." As for savings, which are an economic statement of faith in the future, what was the point? To have more rubles with which to scour empty shelves or to stuff under the mattress? But there was also no point in complaining. The Ministry of Finance was, like everything else, subordinated to the Ministry of Fear. The ruble, quite simply, was the monetary manifestation of totalitarianism.

Moreover, while the ruble was nearly worthless at home, it was totally without value abroad. No banker or investor wanted to hold an artificial, or "soft," currency. The ruble was an impediment to foreign trade and contributed to the isolation of the U.S.S.R.

Then came Gorbachev, glasnost, democratization and their natural consequence: the collapse of the Soviet state. We in the West have tended to underestimate the economic factor in the breakup of the U.S.S.R. We saw Balts, Georgians and Ukrainians venting their hatred of Russia and wrenching free of those notorious Russian-dominated institutions of repression -- the Communist Party, the KGB, the Soviet army.

But the secessionists also wanted to escape the tyranny of the ruble. So did many Russians. In 1990 I paid an eye-opening visit to the Pacific port of Vladivostok. The population there is overwhelmingly Russian, yet the local leaders were almost as eager to break with Moscow as the most fire-breathing nationalists in Lithuania and Georgia. I got the feeling that the city fathers of Vladivostok would have happily annexed their fair city and, better yet, the entire Maritime province of the U.S.S.R. to South Korea or Japan -- if they could only turn in their rubles for won or yen.

The U.S.S.R. is gone, but the funny money remains in circulation. Having fueled the disintegration of the union, the ruble now makes a mockery of the Commonwealth of Independent States. How can a cluster of states that have the weak ruble in common be considered either wealthy or independent?

The ruble threatens the survival of Russia itself. Muslim enclaves have economic as well as tribal and religious incentives to head for the exits. So do my old friends in Vladivostok. Russia may break into a dozen or more parts, reverting to the medieval politics of the city-state. The chances of that arrangement being peaceful are slim. The atomization of the former Soviet Union is bad not just for the people who live there but for the rest of the world too.

To become a viable, modern state, Russia must transform the ruble into a convertible currency. The major industrialized nations should back the International Monetary Fund in setting up what is known in the jargon of the dismal science as a currency-stabilization fund. This would be a pool of hard currency that would guarantee the exchange rate of the ruble at a steady, uniform and realistic level so that it is useful in both internal and external markets.

If such a mechanism had been introduced in the former Soviet Union, say, in January, when prices soared 350%, millions of citizens would have lined up to unload their rubles in favor of dollars or deutsche marks. For a stabilization fund to work, it should be like an insurance policy that provides peace of mind but is never cashed in, or like the gold in Fort Knox that used to back the dollar.

| It can be done. For all its troubles, Poland has made the transition to a convertible currency without having to draw on the hard-currency reserves set aside in a special account by the West.

Last week the IMF endorsed the idea of a stabilization fund for Russia, and President Bush indicated for the first time that the U.S. may contribute. The more Moscow does to reduce deficit spending and control inflation, the more money the West and Japan should put into the fund, and the greater the chance of peace in the heart of Eurasia.