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Russian central bank

As the year 1992 began, the Russian government and the central bank tightened credit in an attempt to slow the growth in the supply of rubles. However, the moves weren't popular with the country's giant state-run industrial enterprises, which are still dependent on official subsidies and cheap credit. In July 1992, the Russian Parliament appointed Viktor Gerashchenko head of the central bank. One of his first acts was to say that he didn't think the time was right to make the ruble convertible. Then he said that he would continue to extend credits to bankrupt and inefficient state enterprises.

a. How independent is the Russian central bank likely to be? What political pressures is it facing?

b. What is the likely effect of Mr. Gerashchenko's statements on inflationary expectations in Russia?

c. How do you think the ruble:dollar exchange rate was affected by these statements?

d. In 1995, the Russian Central Bank signed an agreement with the International Monetary Fund not to issue cheap credits to state enterprises. How should the ruble react if the central bank sticks to its agreement with the IMF?

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a. How independent is the Russian central bank likely to be? What political pressures is it facing?

The Russian central bank is unlikely to be very independent since the Russian Parliament can fire its head at will. Mr. Gerashchenko will face pressure to keep funding the bankrupt state-run industrial enterprises with newly-created money. If credit is cut off, these enterprises will go under. Their managers and workers will continue putting pressure on Parliament and the central bank to ...

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