Dollarization of russian economy for sometimes

 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

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, 

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

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