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 government to foster the establishment of real banks that would fulfill the fundamental role of banks everywhere—financing 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 imitation 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 commerical 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 sales 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. Bernstram and Rabushka's bold intriguing, provocative proposal—resting on an elaborate strategy of debt-for-equity swaps—would fix the banks, reduce government debt, strengthen the independence of the Central Bank, and lay a solid foundation for sustained economic growth.

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Copyright ©1998 by the Board of Trustees of the Leland Stanford Junior University. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without written permission of the publisher.

TABLE OF CONTENTS

• Introduction
• Russian Economic Conditions
• The Nonmonetary System and the Ersatz Banking System in Russia: 1991–1995
• The Emergence of a Resource-Based Monetary System, Hamstrung by the Persistence of Ersatz Banks: 1996–1997
• Will Russia Maintain Its Emerging Monetary System and Develop Real Banks? 1998 and Beyond
• About the Authors
• Index