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The 2001 Spaso Odyssey

Do you think the Americans should pay fair market value for the Spaso House?

October 15, 2001

Do you think the Americans should pay fair market value for the Spaso House?

In these uncertain times, it is useful to remember that authoritarian regimes and dictatorships like to keep their currencies strong. That grants them bragging rights — not to mention cheap imports for the elites in power.

A strong currency is good for political prestige internationally — even though it may be bad for the nation’s economy. For example, historians explain the persistent economic troubles in Mussolini’s Italy in the 1930s by the Duce’s insistence on keeping his beloved lira overvalued.

Inflation is not the only thing that creates crazy financial discrepancies between the Russian and American idea of fair market value.

The leaders of the old Soviet Union, which disappeared from the political map in December of 1991, were no different. For years, they insisted that their ruble had to be equal to the dollar. Obviously, the reason for that was rooted much more in the notion of superpower parity — rather than in any sound economic concepts.

On the black market, which provided a more realistic valuation, the exchange rate was at least 5 rubles per dollar. And yet, the Soviet government stubbornly insisted all along that international commercial transactions be conducted at the exchange rate of about $1.10 per ruble.

That erstwhile insistence has now come to haunt the leaders of today’s Russia. Here is why: Some 30 years ago, when the United States rented Spaso House, its ambassadorial residence in Moscow, the reigning Soviet government demanded a rent of 72,500 rubles per year. As a world power, the Soviets made sure that the contract was denominated in rubles, not dollars.

At the official, overvalued exchange rate, these rubles came to a steep $80,000. Quite a bit for a year’s rent of a large townhouse. At the time, ordinary Russians paid less than $10 a month for their apartments.

The leaders of the old Soviet Union insisted that their ruble was equal to the dollar — for reasons related to superpower parity rather than economics.

But even if the Americans had wanted to object, they had no place to go. Under communism, the Soviet government owned all the real estate in the country. It was not like you could play one landlord against another to get a better deal.

So, for a couple of decades, Americans had to put up — and shut up. But then came the 1990s, when the Soviet Union collapsed — and the overvalued Russian ruble plunged.

The Russian government printed rubles as quickly as the printing press would allow it. Inflation rocketed to as much as 50% per month, which economists define as hyperinflation. The ruble exchange value fell to 6,000 per dollar by 1998. That is quite a way down from the previously presumed parity at around 1:1.

By that time, domestic prices in the Soviet Union had become unmanageable. Even a toaster cost over 100,000 rubles. When inflation eventually slowed down a bit, the new Russian government decided on a currency reform. It re-denominated the ruble — by lopping off three zeros. The dollar was thus now worth six new rubles, which made the ruble more or less equivalent to the French franc at the time.

But Russia’s new-found currency stability did not last. In August 1998, Russia suffered a financial crisis and defaulted on its loans. The ruble resumed its downward spiral.

Authoritarian regimes like to keep their currencies strong — granting them bragging rights and cheap imports for the elites in power.

These days, the exchange rate is around 29.50 rubles per dollar. But if you do the real math and look at the original, Soviet ruble, a much starker picture emerges. The true new exchange rate is actually 29,500 old rubles per dollar.

But all that financial turbulence was of no concern to Uncle Sam and his ample coffers. The U.S. Embassy was locked in a long-term contract. It continued to pay the same 72,500 rubles per year for the Ambassador’s residence, no matter what.

Except when all those rubles were translated back into dollars, Americans watched the once princely sum dwindle to small change. In fact, at today’s exchange rates, the rent on Spaso House is equivalent to around $2.50. It’s about time the American taxpayer got a bargain!

The name of the residence, Spaso House, comes from an early 20th century merchant who built the place. But you would think that it is actually derived from the Russian word for Thank you — “Spasibo.”

By comparison, even a relatively modest New York City apartment rents for around $3,000 per month. Given that price, $2.50 will get you as much as a 30-minute stay!

For decades, Americans had to put up — and shut up. But then came the 1990’s, when the overvalued Russian ruble plunged.

On the other hand, a New Yorker who has just mailed a monthly rent check of $3,000 to his or her landlady could have lived in the palatial splendor of Spaso House for an incredible 1,200 years — well into the fourth millennium.

The Russians, of course, have been protesting, demanding that America pay market rent. It has become a major diplomatic spat — and a source of friction between two nuclear powers. Especially since in the post-communist Moscow, rents have gone literally through the roof. But a lease is lease, say the Americans.

Americans also claim that it is only fair that they now get a recompense for the past price gouging on the part of the Soviet government. Unfortunately for the Russians, the lease is to run for another 20 years.

But inflation is not the only thing that creates crazy financial discrepancies between the Russian and American idea of fair market value. Take the case of Harrison Ford, the movie actor of “Lost Ark” fame. He was selected to play the captain of the doomed Russian submarine, the Kursk, in the “Windowmaker”, a Hollywood thriller scheduled for release in 2002.

For his trouble, Mr. Ford received a cool $25 million. Now, the real-life Russian commander of the Kursk, which sank in August 2000, was earning the equivalent of $214.28 per month. It would have taken him 9,722 years to make the $25 million Ford got.