February 20, 2003
Russia's New Secret Weapon?
By Valeria Korchagina
The government is making it stronger, pushing it on its neighbors and planning to proliferate it around the world.
It's not a new weapon but it could be. It's the ruble.
Emboldened by the unprecedented strength of the currency, which is rising against the greenback for the first time in recent memory, the government is mulling grandiose plans for the ruble, including making it fully convertible internationally and using it as the basis of a monetary union with Kazakhstan, Kyrgyzstan, Tajikistan and Belarus.
"It is possible and it is time to think of a unified currency system for the [Eurasian Economic Union]," Prime Minister Mikhail Kasyanov told the leaders of the five-member EEU during their summit in Moscow on Wednesday.
"We would like, and I think it would be effective, to use the Russian ruble for this purpose," Kasyanov was quoted by news agencies as saying.
Kasyanov's remarks came just a day before the Cabinet is scheduled to debate the Economic Development and Trade Ministry's blueprint for growth through 2005, which calls for, among other things, "securing full convertibility of the national currency in the nearest future."
That is, the ministry wants the ruble to join the buck, euro, yen and pound as permanent features on exchange-rate boards in banks around the world as soon as possible.
In order for the ruble to achieve hard currency status, however, the government would have to radically liberalize its currency regime and allow Russians to move their money around the globe freely -- an idea many economists support.
"Current protectionist measures are a wall that don't do anything but degrade the choice people can make," said James Fenkner, head of research at investment bank Troika Dialog.
Such measures, he said, do not work in practice -- they only create obstacles to the effective use of capital, leading to too much money floating around that is not being used efficiently.
Awash in record amounts of petrodollars, the Central Bank has been struggling to strike a balance between excessive ruble appreciation, which hurts domestic producers, and inflation, caused in part by its own rules that force exporters to sell half of their hard currency revenues.
One result of this is booming demand for domestic debt paper as investors struggle to put their rubles to use.
"[The currency control regulations] force people to make decisions they otherwise wouldn't make," Fenkner said. "Too many Russians currently buy Russian bonds, which artificially depresses yields, raises prices and causes excessive issuance by domestic issuers."
One way to solve this problem is to make the ruble fully convertible, which is certainly possible, given Russia's track record over the last five years, Fenkner said.
Russia now has a proven five-year history of credible monetary policy -- it has not squandered, for example, its oil windfall, but has used it to reduce the national debt to an expected $109 billion by year's end from $166 billion in 1998, he said.
"France could envy this."
Not all economists, however, are as bullish on the ruble's future.
"In principle, the ruble should be convertible one day. But among the requirements for full -- internal and external -- convertibility, one needs to eliminate all sorts of restrictions, including those on the [movements of investments]," said Christof R?hl, the World Bank's chief economist for Russia.
"But if these restrictions are removed, and people can move and exchange money here and abroad freely, there is always a danger of quick capital outflow," he said.
Alexei Moiseyev, senior economist at Renaissance Capital, disagreed, saying current rules do little to stop "big money" from leaving the country.
However, it is much harder to move "middle-class money" abroad, in light of worldwide efforts to combat laundering, Moiseyev said.
Meanwhile, creating a monetary union with four other former Soviet republics is not as farfetched as it may sound.
"The economies of these states were tightly integrated under the Soviet Union," Moiseyev said. "Simplifying trade by means of using the ruble as the main currency for deals or even turning it into some kind of alternative to what the euro is to the European Union should give a boost to national economies," he said.
The first test will be in less than two years, when Belarus officially abandons its own ruble for the Russian version.
Even with relatively tiny Belarus, it took years for Moscow to convince Minsk to give up on its desire to print its own money.
This is an issue of reduced sovereignty that will be difficult for the other EEU countries to swallow, Moiseyev said.
Tatyana Paramonova, first deputy chairwoman of the Central Bank, said Russia will insist on full control of money printing and monetary policy.
"We will not back down on this," she told Ekho Moskvy radio station Wednesday.
"Historically there are practically no examples of currency being emitted by different centers," she said.
Kasyanov said that before the ruble could become the single currency of the EEU, key factors like inflation, budget policy and business conditions would have to be equalized.
"The main problems continue to be the differences in economic development and mismatched rates of transition," he said.
It was unclear Wednesday how far other EEU members would be ready to go in order to acquire the ruble as their national currency, although the initial proposal seemed to have been voiced by Kazakh President Nursultan Nazarbayev.
Nazarbayev said the ruble's reign within some of the former Soviet republics could be re-established by 2011.
Staff Writer Victoria Lavrentieva contributed to this report.