Fixing Russia’s Banks: A Proposal for Growth by Michael S. Bernstam and Alvin Rabushka targets financial system in need of repair.

Tuesday, July 14, 1998

According to Hoover Institution fellows Michael S. Bernstam and Alvin Rabushka, authors of the new volume Fixing Russia’s Banks: A Proposal for Growth, now available from Hoover Institution Press ($16.95, paper), Russia’s attempt to create a thriving free market economy is failing largely because its financial system is built on what amounts to a socialist sham: ersatz banks.

Bernstam and Rabushka write that the Russian government has failed to foster the establishment of real banks and has not encouraged or supported the philosophy that has created strong and honest banks around the world, that is to finance output and production by mobilizing household savings and, in turn, lending the funds to productive enterprises.

Fixing Russia’s Banks documents how Russia’s financial system is built on the inferior imitation banks that have served largely as tools of the government to redistribute public funds to favored firms. The highly vaunted achievements of privatization, removal of price controls, and foreign trade liberalization have failed to produce growth because of a lack of private financing -- national income has declined nearly 40 percent since 1992, with no recovery in sight, they write.

Bernstam and Rabushka have painstakingly reconstructed the balance sheets of Russia’s commercial banks to show that the banking system has been collectively insolvent since 1992. Russian banks have been kept afloat by injections of inflationary credit, by preferred sales of high-interest bonds, and by sales of shares in state-owned natural resource firms to the banks at bargain basement prices for final resale to foreigners.

Failing to fix Russia’s banks risks further economic stagnation or decline and financial catastrophe. Bernstam and Rabushka’s bold, intriguing, provocative proposal -- resting on an elaborate strategy of debt-for-equity swaps -- would fix the banks, reduce government debt, strengthen the independence of the Central Bank, and lay a solid foundation for sustained economic growth.

Michael S. Bernstam is a research fellow at the Hoover Institution, Stanford University. He was an economic advisor to the Russian government, the Central Bank of Russia, Office of the President, and the Russian Parliament on various policy projects. He coauthored several studies for the World Bank and the U.S. Agency for International Development on reforming Russian energy, banking, and housing industries. Bernstam is a regular commentator on Russian economy and finance for Radio Liberty.

Alvin Rabushka is a senior fellow at the Hoover Institution, Stanford University. He is the author or coauthor of numerous books and articles on the economic development of Hong Kong, Taiwan, Singapore, Korea, Malaysia, and China, and he writes an annual report on the Israeli economy. Rabushka also developed, with Robert Hall, the concept of the flat tax, which was recognized in Money magazine’s “Money Hall of Fame” (1992) for its pioneering contributions to financial innovation. Their most recent work is The Flat Tax, 2d. ed. (Hoover Press, 1995).

Fixing Russia’s Banks: A Proposal for Growth is available from Hoover Institution Press, 650/723-3373 or 1-800-935-2882.

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Visit Dr. Bernstam's web site at, Dr. Rabushka's web site at or the Hoover Institution Web Site at