- The Washington Times - Wednesday, April 19, 2000

Will Vladimir Putin be a Rasputin or a reform Putin? When the Soviet Union collapsed in 1991, Russians looked west for advice and assistance. What they got was International Monetary Fund loans tied to a lot of bad advice from Keynesian economists so-called "shock therapy" that pushed the country precipitously into a market economy without the prerequisite sound currency, functioning banking system and rule of law to protect private property.

When prices were decontrolled, inflation exploded so that the ruble, then exchanging at 4-to-1 with the dollar, disintegrated and a new ruble had to be instituted by knocking three zeros off its old value. When state-owned assets were privatized, a few robber oligarchs stole most of them.

In addition, the IMF demanded that Russia keep tax rates exorbitantly high to fight deficits, which crushed incentives and created an enormous underground economy.

It is not surprising that the Russian economy remains a basket case, even though it has performed much better than expected after collapsing in 1998 during the aftermath of the Asian financial crisis. Still, the ruble, at almost 29 to the dollar today, has not recovered to its 1998 value of 6 to the dollar.

Since being elected president, Mr. Putin has indicated that he seeks to give Russia a "second beginning." He says economic reform will be a top priority for his administration and has talked about overhauling the tax code and cutting marginal tax rates, reportedly to 20 percent. He has signaled a willingness to attack corruption, institute reforms necessary to protect property rights and to encourage foreign investment in Russia "The right of ownership must become a priority in Russia," he told the New York Times. Bravo.

It is in our vital interest for democracy and capitalism to succeed in Russia. There are still 10,000 "loose nukes" in Russia that could find their way into the hands of people desiring to do the United States harm. We can raise the odds Mr. Putin will succeed in his reforms by engaging in free and open trade with Russia and by keeping the IMF out of Russia with its poisonous policy mix of high tax rates and a weak and floating ruble.

To his credit, Mr. Putin appears in no hurry to resume IMF borrowing. He should, however, go beyond merely resisting new loans on old terms and call on the IMF to forgive those past loans because they were based upon such extraordinarily bad advice. Perhaps he should sue the IMF in the appropriate courts.

In 1922, in the midst of economic upheaval, V.I. Lenin stabilized the currency by creating the gold-backed chervonets. Shortly thereafter, John Maynard Keynes wrote about the successful monetary reform: "Lenin was certainly right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and it does it in a manner which not one man in a million is able to diagnose."

With oil revenues up in Russia today, and tax revenues rising, much of the pressure on the ruble of the past several years has been temporarily relieved. But as the price of oil falls, which it will, tax revenues will fall, and the ruble once again will come under pressure. Therefore, now is a perfect time for Russia to lay the foundation for economic stability and prosperity by restoring sound money and enacting a simple, low-rate tax system.

Mr. Putin should link the Russian currency to a stable store of value, perhaps even taking a page out of history and issuing a gold-backed ruble based upon Russia's national gold reserves, which could be used as the currency to pay government employees and pensioners. The Russian central bank could stabilize the remaining outstanding paper rubles by adopting a price rule (I favor a gold-price rule) to direct its open-market operations and selling asset-backed (e.g., oil- and other commodity-backed) bonds to soak up excessive paper rubles.

With a program such as this in place, it would be safe for the U.S. Treasury to assist Russia in its endeavor to launch a sound, gold-backed ruble by purchasing Russian bonds that may be required to cover any temporary revenue shortfall as the new tax code was implemented and the Russian economy recovered. The Russian government would then be able to repay those bonds with a ruble as good as gold.

With strong performance by a reformed Russian economy based on low tax rates, sound money and open trade with the West, Russia can move to the type of liberal democracy that can be a peaceful partner for the 21st century.



Jack Kemp is co-director of Empower America and distinguished fellow of the Competitive Enterprise Institute.

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