The Hyperinflation in Russia in the 1990's
http://www.applet-magic.com/russianinflpod.htm
San José State University
Department of Economics
applet-magic.com
Thayer Watkins
Silicon Valley
& Tornado Alley
USA
The Hyperinflation in Russia in the 1990's
The Nature of the Effect
of the Removal of Price Controls
The nature of the hyperinflation in Russia in the 1990's is widely misunderstood. It was not
due to any shock therapy; it was due to the expansion of the money supply by the central
bank of Russia. The removal of price controls would have resulted only in a one-time
ostensible price increase, but even this is dependent upon an erroneous notion of what
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The Hyperinflation in Russia in the 1990's
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constitutes a price. When price controls hold prices down below their market equilibrium rate
they create a shortage at the control level of prices and a black market. People cannot buy as
much as they would like at the control prices and often it is only a lucky few with inside
connections who get to buy at the control prices. Those without those connections and those
who want more than they get at the control price must go to the black market and pay the
higher price. The real market and the real market price is the black market price. Suppose
gasoline is rationed and the ration price set at $4 per gallon but the black market price is $7
per gallon. Someone who buys gasoline at $4 per gallon decides whether to use that gallon or
sell it on the black market based upon the black market price of $7 per gallon not the
purchase price of $4 per gallon. The real price therefore even for those who buy at the control
price is the black market price.
The black market price is not only higher than the control price, it is higher than the
equilibrium price. Therefore when price controls are removed the real price goes down not
up. The real price goes from the black market price down to the market equilibrium price.
The control price is irrelevant but it is the price that would be used in price indices for
measuring inflation. So the effect of the removal of price controls is not real inflation but the
change from a bogus price to a real market price. However, without the continual expansion
of the money supply there would be no further price increase.
Monetary Policy in Russia in the 1990's
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The Hyperinflation in Russia in the 1990's
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The head of the Central Bank of Russia was Viktor Gerashchenko. He was a dedicated
Communist and, as such, not at all interested in having the Russian economy make a smooth
transition from the Stalinist central control system to some version of a private market economy.
Most of the State Enterprises of the Soviet Union operated at a deficit; i.e., the ruble value of
their products was less than the ruble costs of the labor and raw materials that went into
producing them. Under the old system the state covered the difference. During the transition the
government of Russia stopped covering those deficits. The enterprises were then faced with a
choice of cutting costs, shutting down or finding some other way to cover the deficit. The only
feasible way to cover their costs was to get loans from the Central Bank. The financial system in
Russia was complicated and enigmatic but in a simpler system the effects of those loans would
have worked as follows. The loans were in the form of accounts granted at the central bank. In
a fractional reserve banking system accounts at the central bank are high powered money. The
total money supply expands by a multiple of the amount of those central bank accounts
granted. When the money supply expands in excess of the real growth of the economy there is
an increase in the price level -- inflation. In the case of Russia at the time there was no real
Viktor Gerashchenko
growth in the economy, it was in fact contracting. If the money supply expands 5 percent and
production is contracting 20 percent this is an expansion of the money supply by about 25 percent per unit of output and
there would be correspondingly high impact on the price level. When inflation develops the velocity of money increases and
thus the impact on the rate of inflation is due to the sum of the rate of growth of the money supply and the rate of increase
of the velocity of money. Thus prices are hit by a triple whammy of expanding money supply, decreasing output and
increasing money velocity. This is how inflation rates can be driven to astronomical levels. For more on this see the dynamics
of inflation and episodes of hyperinflation.
As the price level went up the state enterprises had to go to Viktor Gerashchenko and the Central
Bank for bigger and bigger loans so the rate of inflation escalated, reaching a level of about 5000
percent per year. Finally Viktor Gerashchenko was fired as head of the Central Bank of Russia in
1994 and his replacement was able to bring the inflation rate down to about 10 percent per
month.
In 1998 after the Russian default on its debt Boris Yeltsin in some
complicated political arrangement reappointed Gerashchenko as head of
the Central Bank. This time he was not the disaster that he was in the
early 1990's. Perhap he was chastened by Jeffrey Sachs' depiction of him
as the "Worst Central Banker in the world." Gerashchenko continued to
head the Central Bank until 2002 when he retired from the Bank but
went into politics and was elected to the Duma.
Tatyana Paramonova
Below are the rates of inflation provided by the International Monetary Fund (IMF) on
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inflation in Russia from 1993 to 2004. The IMF was not able to provide that statistics on the
more severe inflation that preceded 1993.
Annual Rates of Inflation
(%/yr) in Russia, 1993-2004
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Inflation in
Year Producer
Prices
(%/yr)
Inflation in
Consumer
Prices
(%/yr)
Inflation in
the Wage
Level
(%/yr)
1993 943.76
874.62
822.1
1994 337.00
307.38
255.9
1995 236.46
197.41
142.2
1996 51.21
47.57
64.8
1997 14.67
14.62
23.7
1998 7.03
NA
15.3
1999 58.95
85.65
54.7
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The Hyperinflation in Russia in the 1990's
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2000 46.53
20.77
52.5
2001 19.17
21.50
43.3
2002 10.43
15.72
27.3
2003 16.38
13.66
26.1
2004 23.35
10.89
22.5
The IMF gives the rates of inflation in consumer prices from 1993 to 1997. From this a price
level for each year can be computed.
The Money Supply and
the Price Level in Russia,
1993-1998
Consumer
Price
Level
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(millions of rubles)
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The Hyperinflation in Russia in the 1990's
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Year (1993=100) Money
Supply
QuasiMoney
1993 100.0
23,881
17,102
1994 974.62
68,544
61,187
1995 3970.41
151,627
124,514
1996 11808.39
192,402
164,922
1997 17425.64
270,602
192,246
1998 19973.27
344,113
289,514
For 1998 and the years thereafter the IMF gives an index of consumer prices.
The Money Supply and
the Price Level in Russia,
1998-2004
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(millions of rubles)
Consumer
Money
Year Price
Level
Supply
(2000=100)
QuasiMoney
1998 44.6
344,113
289,514
1999 82.8
527,627
465,574
2000 100.0
880,524
688,460
2001 121.5
1,193,395 944,816
2002 140.6
1,498,463 1,361,524
2003 159.8
2,181,933 1.780,151
2004 177.2
2,848,345 2,450,354
The Quantity Theory of Money explains the increase in prices as being not only due to there
being more money in circulation but that it is being spent faster. The income velocity of
money is defined as the Gross Domestic Product (GDP) divided by the money in circulation.
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The Hyperinflation in Russia in the 1990's
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The velocity of money in Russia for the period 1993 to 2004 are given below. In this case the
period was one of the moderation of inflation and there is a downward trend in the velocity of
money after 1996.
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Money+
GDP
Year (billions Quasi-Money
rubles/yr) (billions
rubles)
Money
Velocity
(times
per year)
1993 172
41.0
4.20
1994 611
129.7
4.71
1995 1585
275.8
5.75
1996 2200
357.3
6.16
1997 2602
462.8
5.62
1998 2630
633.6
5.68
1999 4823
993.2
4.86
2000 7306
1569.0
4.66
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The Hyperinflation in Russia in the 1990's
http://www.applet-magic.com/russianinflpod.htm
2001 8944
2138.2
4.18
2002 10818
2860.0
3.78
2003 13201
3962
3.33
2004 16779
5299
3.17
Conclusions
The hyperinflation in Russia in the 1990's followed the standard senario. The money supply
was increased excessively leading to inflation. The velocity of money increased adding to the
impact of the increased money supply on prices. The vicious circle continued until Viktor
Gerashchenko was replaced as head of the Central Bank. The blame for the social
devastation which resulted from the hyperinflation such as the impoverishment of the
pensioners and the destruction of the value of lifetime savings lies with the monetary policies
of Viktor Gerashchenko. When Gerashchenko was replaced by Tatyana Paramonova the
hyperinflation quickly disappeared although significant inflation continued.
(To be continued.)
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