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Russia prints money
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September 17, 1998: 5:05 p.m. ET
Central bank implements plan to print money to buy back T-bills, bonds
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NEW YORK (CNNfn) - In efforts to get the frozen payments system flowing again, Russia's central bank said Thursday it will begin printing money and allow commercial banks to dip into its reserves.
The central bank said it will allow some commercial banks to use their reserves to help clients make payments. To maintain reserve levels, however, the central bank also said it will buy GKO treasury bills and OFZ bonds back from the banks, paying them face value for the paper with newly-printed money.
Central Bank First Deputy Chairman Andrei Kozlov said banks may have to use most of their 27 billion rubles in reserves to get the debt payment system functioning again.
Russia has frozen $40 billion of short-term domestic government paper pending a widespread debt restructuring.
Some overseas banks already have said they fear discrimination during the restructuring, with local banks possibly getting an unfair advantage.
"This is an outright bold statement that they're going to clear the problem here, bolster these banks and not really care about foreign holders of the GKOs," said Stuart Brown, of Banque Paribas in London. "They've openly announced they're going to discriminate in favor of Russian banks. It also looks like the first stages of a bailout of banks who probably shouldn't be bailed out."
Russia has previously stated it will print money to wipe out its domestic debts so it can start reforms with a clean slate.
The concept was touted by Viktor Chernomyrdin, who was acting as Prime Minister until last week when Yevgeny Primakov replaced him.
Chernomyrdin's plan called for "economic dictatorship" starting next year that involved "controlled" monetary emission in the interim.
The central bank has conceded that printing money will cause a short-term burst of inflation, but said it is necessary to begin serious economic reforms unburdened by the debts the government racked up in eight years of half-hearted reforms.
Primakov has vowed not to allow hyperinflation, but some analysts remain skeptical that printing money will solve Russia's financial crisis.
"I don't know the details, but if it is all as you say, then in the course of a few days the ruble will rise," said Vladimir Mau, deputy director of the Institute of the Economy in Transition in Moscow. "I am worried that the payments system will deteriorate a bit because, expecting inflation, everyone will hold dollars and decide not to spend them."
Russia's central bank dropped its official ruble rate by 15 percent for Friday to 14.6000 to the dollar, following a 23 percent drop in the official ruble rate for Thursday.
The rate, based on trade on the Moscow Interbank Currency Exchange's (MICEX) electronic SELT system and on the interbank market, had been 12.4509 to the dollar for Thursday. 
--from staff and wire reports
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