The first non-payment crisis broke out ill Russia as far back as 1992. Inmproverished by the price liberalization, unreformed enterprises were also starved of much-needed funds to repay their debts. Victor Gerashenko. head of the Central Bank at the time, resolved the crisis simply by the mutual canceling of debts. In 1994, the nonpayment crisis erupted again. But this time the government decided to settle the problem by economic, not administrative  methods. True. economic methods called for patience and time.

Three years after the first nonpayment crisis it was not enterprises but banks that proved mutually insolvent. The Russian banking system was hit by its first serious crisis, which was inevitable and, in fact, easily solvable.

The present-day situation on the interbank credit market is a result of The Central Bank's tough policy and some inherent flaws in the practice of fledgling banks. Indeed, the low payment discipline, the mutual failure to repay credits, is sometimes not a result of financial non-professionalism or insolvency but of the psychological inadequacy of Russian bankers who are not in the habit of paying their debts in time and are inclined to engage in speculative deals in conditions of high inflation.

Some banks remained without money because credits had been repaid to them. Banks make a refit because credit rates are higher than deposit rates. If credits are not repaid, a bank is unable to make payments to its depositors. As a result, it is caught in payment crisis.

Paradoxically, the banking system was afflicted with a serious ailment caused by the Central Bank's classic monetarist policy of curbing inflation for under an abnormal system the reaction to adequate methods of regulation is abnormal too. Proceeding from budget interests and striving to bring inflation down, the state bank kept the credit rate high (it was lowered in the summer of last year and this disorganized the financial system). The Central Bank set a higher rate for the amount of compulsory reserves which commercial banks must keep in it. The higher this rate. the less money is in circulation, and inflation is therefore lower.

Generally speaking, the Central Bank could act more flexibly because the tough attitude taken by its acting head Tatyana Paramonova led to an undesirable conflict between the monetary-credit authorities and the banking community, discontent among many economic chiefs in the government and the presidential administration, and a strong opposition to the Central Bank's policy in the lower house of parliament. But, in principle, it would be wrong to lay the whole blame on the Central Bank because the latter acted reasonably in this critical situation.

The domino effect is clearly visible in the game played by commercial banks. Their failure to make payments brought about a liquidity crisis, and this should be a bitter lesson to the players. The crisis can be overcome by government intervention. Incidentally, some banks and banks behave like the depositors who have been swindled, like a person who deposited money in an obviously unreliable «pyramid» and now demands that the state return this money to him. I would advise these banks and bankers to settle their own accounts first and then put the blame on Paramonova or Chubais.

The Central Bank stepped into the breach so that the bank crisis would not spark an economic and then political crisis and would not lead to the formation of a party of ruined bankers in addition to the party of robbed depositors. It provided a short-term credit of 300 billion rubles, an amount enough to stabilize the financial market. The purchase by the Central Bank of slate treasury bills from commercial banks is also a tradition method of increasing the supply of money badly needed by cash-strapped banks.

The latest banking failures should impel the government to speed up the law-making process in the financial sphere. The crisis reminded the authorities once again that ordinary depositors may be hurt in the end. That is why it is necessary as soon as possible to draft laws regulating the insurance of deposits made by citizens.

The crisis is also a lesson for the Central Bank. It will evidently have to cut the refinancing rate, at least a little and lower the rate compulsory reserves without forsaking the monetarist principles. Otherwise, Russia wшll never receive financial support from the IMF.

Crisis if the kind are common in an economy undergoing stabilization measures. Changes in the structure of the banking system are natural at this stage of economic development. The proposed bank mergers, the amalgamation of some banks and the bankruptcy of others had been forecast long ago. The apocalypse can be forecast too. But it will not come if we do not constantly talk about it.

By Andrei Traub

New times / October 1995