Dollarization of russian economy for sometimes

 lars as a vehicle for conducting covert wholesale transactions, for hiding international financial transfers and for holding underground sa...

 lars as a vehicle for conducting covert wholesale transactions, for hiding international financial transfers and for holding underground savings. This applies to the full spectrum of illicit and underground activities. The more popular the use of United States dollars, the easier it is to convert it into local currency or vice versa depending on need, and eventually obscure the trail of illicit proceeds. In the Russian Federation, the dollarization of the economy or transfer of assets denominated in national currency into foreign currency (dollars) has been continuous since 1992, when the liberalization of foreign trade began. Since then, the dollarization indicator shows a strong upward trend with some fluctuations reflecting policy decisions by the Russian authorities—undertaken or anticipated. In October 1994, in response to “Black Tuesday”, which saw a one-day drop of 20 per cent in the rouble’s value against the United States dollar, the indicator showed a jump in the dollarization. In 1995, heavy interventions by the Central Bank of the Russian Federation to defend the rouble led to a reverse trend of flight from dollars to roubles. In anticipation of fiscal instability and rouble devaluation, demand for dollars jumped again in 1997 and has continued to rise ever since. In 1996 and in the first seven months of 1997 Russian residents bought $14.9 billion—twice the amount of dollars purchased in the previous four years.

16 The financial crisis of 1998 further contributed to the dollarization of the Russian economy. Thus, the high rate of dollarization sustained in the second half of the 1990s reflects an increased uncertainty regarding holdings in national currency. Frequent policy changes and reforms by the Russian authorities that led to losses in the value of roubles, various financial speculative schemes, including pyramid schemes, as well as financial crises involving massive bankruptcies, all contributed to the rouble becoming seriously discredited. The extent of currency substitution is reflected in the ratio of foreign currency cash to national currency cash. The extent of substitution of domestic bank deposits by foreign currency deposits can be seen in the ratio of these deposits to the M2 aggregate, which is equal to money in circulation (MO) plus domestic currency assets held by residents (households and non-financial firms) at settlement in current and deposit accounts in banks.1

7 Dollarization is expressed in the use of United States dollars as a means of payment (currency) and as a means of savings (assets). Comparison of two trends—holdings in cash and deposits in the Russian Federation—shows high and continuous growth of the foreign currency in cash versus deposits. In 1997, the foreign currency component in the money flow was above 40 per cent, of which 27.5 per cent was in cash.18 Strong preference for foreign cash might imply that the rise in shadow activities determines the dollarization trend in the Russian Federation. According to the Central Bank of the Russian Federation, in 1996 $33.8 billion of cash in foreign currency flowed into the Russian Federation through the banking system while the outflow was only $309.5 million (balance of $33.5 billion). In 1997, 

the difference between inflow and outflow was $37.1 billion, and, in 1998, $15.8 billion, the latter reflecting a reduction in inflow as a result of bankruptcies during the financial crisis. Thus, between 1996 and 1999 on average $22.8 billion of foreign cash entered the Russian Federation, the number exceeding some estimates of capital flight from the Russian Federation.19 As a result of these inflows, the amount of foreign currency significantly exceeds cash holdings in roubles (expressed in United States dollars at the current exchange rate). It is ten times higher than the roubles holdings if bank transactions only are included, and three times higher if unorganized imports (“shuttle” trade) is taken into account. According to official estimates “shuttle traders” account for 14.5 per cent of total imports and consume as much as $10-15 billion. Thus, if one deducts “shuttle trade” import (about $60 billion) from the amount of foreign cash accumulated from 1996 to 1999 ($90.2 billion), then the balance of over $30 billion is estimated, which is still three times higher than the amount of roubles in circulation.20 This increasing amount of foreign cash in the Russian Federation should be examined closely as a possible symptom or catalyst of criminal and shadow activities, which eases transactions with illicit proceeds. The dollarization debate21 with regard to the Russian Federation should incorporate this examination.