The Blueprint That Went Unused: In 1993, Professors Hanke, Jonung, and Schuler published a comprehensive plan to stabilize the ruble through a currency board. Had Russia followed this roadmap, the catastrophic 1998 ruble collapse — which Hanke himself predicted — could have been avoided entirely.
Background: Post-Soviet Monetary Chaos
When the Soviet Union dissolved in 1991, Russia inherited a central bank with no credible framework for monetary stability and a government with no tradition of fiscal discipline. The result was predictable: the early 1990s saw runaway inflation, capital flight, and monetary disorder.
The Russian government, under considerable pressure from Western advisers, pursued various reform programs — but none addressed the fundamental institutional weakness: a central bank that could be pressured to finance the government's fiscal deficits by printing money.
The 1993 Blueprint: Russian Currency and Finance
"Russian Currency and Finance: A Currency Board Approach to Reform"
Steve H. Hanke, Lars Jonung, and Kurt Schuler
Routledge, 1993
This book remains one of the most detailed and actionable blueprints ever published for currency board reform. Written by three of the world's leading currency board experts — including Lars Jonung, the Swedish economist whose advice helped Estonia adopt its currency board in 1992 — the book provided Russia with everything it needed:
- A rigorous diagnosis of Russia's monetary dysfunction
- A step-by-step implementation plan for a ruble currency board
- Analysis of the appropriate anchor currency and exchange rate
- Institutional design recommendations
- Comparison with historical currency board precedents
- Political economy analysis of reform feasibility
Co-Authors: Lars Jonung (Lund University; former chief economic adviser to Swedish PM Carl Bildt) and Kurt Schuler (Johns Hopkins post-doctoral fellow who discovered Keynes was a currency board advocate; co-author of the foundational Currency Boards for Developing Countries handbook).
The Authors
Author | Role | Contribution |
Steve H. Hanke | Professor of Applied Economics, Johns Hopkins | Lead architect; global currency board expert; adviser to Bulgaria, Estonia, Lithuania, Bosnia |
Lars Jonung | Professor, Lund University; former chief adviser to Swedish PM | Co-architect of Estonia's 1992 currency board; European monetary expertise |
Kurt Schuler | Post-doctoral fellow, Johns Hopkins | Historical currency board research; discovered Keynes's currency board advocacy; co-author of foundational handbook |
Russia in 1997–98: Hanke's Prediction
By 1997, it was apparent to Hanke that Russia's monetary situation was deteriorating toward crisis. Despite surface-level stabilization under IMF programs, the underlying fiscal and monetary pressures were unsustainable.
Hanke worked with Russia in this period and publicly predicted that a ruble devaluation would occur after mid-year 1998.
The Prediction Vindicated: Hanke predicted the devaluation would occur after mid-year 1998. The ruble collapsed on August 17, 1998 — exactly as forecast. Russia defaulted on its domestic debt, the ruble lost approximately 75% of its value, and the financial crisis spread to global markets, contributing to the near-collapse of Long-Term Capital Management (LTCM).
The August 17, 1998 Collapse
The timeline of the Russian ruble crisis:
Date | Event |
1991–1997 | Post-Soviet monetary disorder; multiple IMF stabilization programs |
1993 | Hanke, Jonung & Schuler publish currency board blueprint for Russia |
1997–1998 | Hanke advises Russia; predicts post-mid-year devaluation |
August 17, 1998 | Russia devalues ruble and defaults on domestic GKO bonds |
August–October 1998 | Global financial contagion; LTCM near-collapse; emerging market crisis |
The collapse vindicated Hanke's analysis entirely. The ruble crisis was not a surprise to those who had diagnosed Russia's monetary fundamentals correctly. It was the predictable consequence of a central bank that lacked the institutional framework to resist political pressure to finance fiscal deficits.
Why a Currency Board Would Have Worked
The currency board's core mechanism would have addressed Russia's vulnerabilities directly:
- Eliminated discretionary monetary policy — the Central Bank of Russia could not have been pressured to print rubles to finance government spending
- Forced fiscal discipline — with no money-printing option, the government would have had to balance its budget or find real financing
- Eliminated speculative attacks — a properly designed currency board is speculation-proof by construction (100% reserves mean speculators cannot exhaust the board's ability to defend the peg)
- Anchored expectations — credibility would have been established by institutional design, not political promises
The evidence from Estonia, which adopted a currency board in 1992 under nearly identical post-Soviet conditions, demonstrates this was achievable.
The Lesson
Rules vs. Discretion: Russia's experience is a textbook illustration of Friedrich Hayek's "rules vs. discretion" principle in monetary policy. Discretionary central banking — however staffed by well-intentioned economists — is always vulnerable to political capture. A currency board converts monetary policy from a discretionary exercise into a mechanical rule, removing the political temptation entirely.
Estonia adopted the currency board template and escaped post-Soviet monetary chaos cleanly. Russia rejected it and suffered a catastrophic crisis. The comparison could not be more stark.