Monetary Policies, Banking, and Trust in Changing Institutions: Russia's Transition in the 1990s
Rock, Charles P., Solodkov, Vasiliy, Journal of Economic Issues
Creating a well-functioning market economy is fundamentally an anthropological process as well as one involving politics and economics. We would characterize the ideal government to guide such a process as the "neutral referee" and rule maker. It would need to have adequate power to ensure accountability from the new market actors. Russia's government in the 1990s may have been the opposite of this ideal of neutrality. It favored certain groups to the detriment of others; in some cases, it was to the harm of the general welfare.
Banking has developed in erratic steps that most observers consider inefficient. Too frequently, public policies and legal reforms have been poorly designed and administered. Monetary policies are a case in point. They have developed in frequently incoherent patterns, supporting perverse and economically harmful results.
We look at only part of the story of Russia in the 1990s, in particular, two developments: (1) the loss of citizen trust in Russian financial institutions and (2) the failure to create monetary and financial institutions that could support the real economy (and its foundation, real productive investments).
The First Shocks--1992
In January 1992, Russia liberalized most wholesale and retail prices. The government continued to control the prices of only a handful of key commodities (bread, milk, residential rents and utilities, electricity, natural gas, and retail gasoline). This liberalization failed to take into account the political and economic changes which had occurred between the attempted coup d'etat in August 1991 and the end of the year. The USSR had disintegrated politically; however, the economies of the newly independent states remained linked through the legacies of seventy years of Soviet planning and business practices. The mood of the Russian reformers was exceedingly optimistic about the transition to capitalism, since they were certain that massive Western aid would accompany the process.
The post-Soviet republics' governments did not discuss coordination of policies to deal with the beginning of the transition to a market economy. The necessity of collaboration in the design of a coherent package of monetary, tariff, and taxation policies was not considered.  One can see the policy arrangements of the disintegrated USSR republics in table 1.
The results of such an uncoordinated policy could be nothing but disaster. Moreover, it coincided with hyperinflation and declines in gross domestic products. Inflation in 1992 varied from 951.2 percent in Latvia to 1,528.7 percent in Russia.  GDP declines varied in 1992 from -14, 1 percent, in Estonia to - 52,3 percent, in Armenia. 
The Russian budget immediately came under pressure. This was not only because of the hyperinflation and the need to increase expenditures to maintain some real purchasing power of those dependent on the state (salaries, pensions, enterprise budgets, various other social expenditures) but also the rapid evaporation of state tax revenues. As the collapse in economic activity became widespread, the Russian government and its central bank were pressured to take action. Russian enterprises demanded funds for operations, and after July 1992 governments and enterprises in the non-Russian republics demanded funding to finance their trade deficits with Russia. The Russian government and central bank acted, providing "centralized" loans to Russian enterprises via commercial banks in Russia and "technical" loans for non-Russian enterprises through the local (republican) authorities. Apparently, little of the financing reached the enterprises; rather these funds were used to purchase dollars in the relatively liberalize d Russian foreign exchange market, leading to a strong depreciation of the ruble.
Hyperinflation, and the temporary freeze on deposit withdrawals in state-owned banks, eliminated the real values of bank balances held by citizens. …