In the first four months of the year Latvia was adversely affected by the Russian ruble inflation. In addition, the outgoing cash payments surpassed the incoming money amounts by 122 million rubles (5.9%) in February, but in April by 686 million rubles (29.2%), thus causing a very serious shortage of cash.
Since the money was emitted by Russia, the Bank of Latvia was unable to improve the cash circulation in the country. The situation fully depended on the possibilities to receive or buy cash and credit resources from the central bank of Russia. It was evident that a crisis could develop by the end of May, when the Bank of Latvia would not be able to execute even the most necessary payments.
To resolve the problem, on May 4, 1992 the Monetary Reform Commission [1] of the Republic of Latvia passed a resolution "On Introduction of the Latvian Ruble". From May 7, 1992, Latvian rubles (LVR) were put into circulation in Latvia as a legal tender parallel to the existing ruble notes of the FSU (SUR). It was declared equal in value with the Russian ruble. The nominal values of the Latvian rubles were l, 5, 20, 50, 200 and 500 (later also 2 and 10) rubles.
The liberalization of cash payments was established and withdrawals from the bank accounts were not limited. Beginning May 7, all cash payments were made in Latvian rubles, in case of necessity allowing their exchange for Russian rubles. The vault cash of Russian rubles in the banks increased rapidly, and they were initially used for stabilization of the Latvian ruble. If the vault cash of the Russian rubles held by banks on May 7 was 349.1 million Russian rubles, on July 15 it was already 9.2 times more.
Russian rubles in circulation were increasingly substituted by Latvian rubles. This process is characterized by the following Tables 1 and 2, and Chart 1.
With the inflation level in Latvia decreasing gradually and hyperinflation beginning to appear in Russia, the exchange rate of the Latvian ruble to the Russian ruble remained at 1 : 1, despite the fact that the demand of the latter was significantly lower than the supply. This led to a disadvantageous situation for the circulation of the Latvian money. To prevent this, on July 6, 1992 the Monetary Reform Commission adopted the resolutions "On the Determination of the Latvian ruble as the Only Legal Tender in the Republic of Latvia" and "On the Determination of the Ruble as the Minimum Payment Unit".
In accordance with these resolutions, on July 20, 1992 the Latvian ruble became the only acceptable tender in Latvia. The circulation of the small change of the FSU was discontinued on July 13. On July 20, the existing ruble accounts in the banks became Latvian ruble accounts. Since the Russian ruble became a foreign currency, the Russian ruble customers had to open separate Russian ruble accounts. From July 7 to July 15 every client was entitled to unlimited exchange of Russian rubles for Latvian rubles at the exchange rate 1 : 1.
Table 1
Circulation of Latvian Rubles in 1992(million LVR)
 |
 |
|
|
|
| |||
| Period | Disbursed by banks |
Received by banks |
Emission |
|
| |||
| May (from 07.05.) | 3 084.5 | 1 415.3 | 2 023.4 |
| June | 4 689.7 | 2 711.6 | 2 094.9 |
| July | 6 175.9 | 2 913.0 | 3 423.5 |
| August | 5 576.7 | 4 383.7 | 1 394.5 |
| September | 6 792.8 | 5 076.5 | 1 662.5 |
| October | 7 412.7 | 6 567.0 | 866.2 |
| November | 8 326.5 | 5 980.7 | 2 534.8 |
| December | 9 596.7 | 7 839.1 | 1 493.6 |
| Total in 1992 | 51 655.5 | 36 886.9 | 15 493.4 |
| Average per month | 6 456.9 | 4 610.9 | 1 936.7 |
|
| |||
Table 2
Circulation of Russian Rubles in 1992(million SUR)
|
|
|
|
|
|
|
|
|
| |||
| Period | Disbursed by banks |
Received by banks |
Emission |
|
| |||
| January | 1 494.9 | 2 128.8 | -170.2 |
| February | 2 201.9 | 2 080.3 | 471.2 |
| March | 2 874.7 | 2 440.1 | -188.3 |
| April | 3 034.3 | 2 348.5 | 438.6 |
| May | 671.1 | 1 543.9 | -1 053.4 |
| June | 579.9 | 1 444.7 | -750.5 |
| July | 2 948.6 | 2 726.8 | 378.1 |
| August [2] | ... | ... | ... |
| Total in 1992 | 13 805.4 | 14 713.1 | -874.5 |
| Average per month | 1 972.2 | 2 101.9 | -124.9 |
|
| |||
Chart 1
Turnover of Latvian Rubles and Russian Rubles in Banks, 1992(million rubles)
Latvian rubles paid out
Latvian rubles paid in
Russian rubles paid out
Russian rubles paid in
The above mentioned rate was maintained also after July 20, but the uncontrollable non-cash emissions in different ruble zone territories threatened to flood Latvia with valueless money. For example, the Ukraine, in particular, put 6 billion rubles into circulation in Latvia during the period from June 1 to July 20. The existing accounting system practically provided no defense against this practice. Effective July 24, it was required that payments with each republic of the FSU could be effected through a specific correspondent account opened for this purpose. This gave the Bank of Latvia an opportunity to separate individual republic non-cash money flows. Effective August 4, it was prohibited to transfer funds between accounts of different non-convertible currencies.
[1] The Monetary Reform Commission was established on November 26, 1991, according to the law of the Republic of Latvia to administer the process of monetary reform and introduce the Latvian currency Lats. The Commission consists of the Chairman of the Council of Ministers, the President of the Bank of Latvia and the Chairman of the Economic Commission of the Supreme Council of the Republic of Latvia.
[2] Beginning July 20, the Russian ruble was regarded as a foreign currency.