From Russia with love: stick with the euro
Geoff Winestock
My strongest memory of the time when the rouble zone was breaking up is the Ukrainian black market traders arriving every morning carrying suitcases full of roubles at the Kyiv railway station in Moscow.
I had moved to Moscow in early 1992. The Soviet Union had splintered into 16 politically independent republics at the start of the year and all but three still shared the Soviet rouble as their currency. But soon I was watching an economic calamity which is probably the closest parallel to what could happen in Greece and the euro zone in coming months.
The black market traders had appeared because Ukraine was threatening to quit the rouble zone and switch to its own currency.
Ukrainians were terrified their government would force them to convert their trusted Soviet roubles into some new, worthless, local Ukrainian currency. Or they feared that the Russian government would start issuing new rouble notes and prevent non-citizens converting the Soviet old notes into the new currency. The old rouble notes would no longer be legal tender in Russia.
So Ukrainian traders collected rouble banknotes from Ukraine and were carrying them in suitcases to Russia. Black marketers met them on the stone steps of the station and bought their roubles for gold or American dollars.
That was only the most visible sign of the mess. Behind the scenes, a crazy confusion over monetary and fiscal policy led to hyper-inflation on a Zimbabwean scale.
The Russian Central Bank in theory had a monopoly on printing roubles, but the new republics had a back-door way of creating their own rouble money. If Armenia, say, was short of money, it would order the new Armenian central bank to issue it credit. The Russian Central Bank would have to print roubles to cover this bank entry.
The Russians eventually realised they were paying for other countries’ budget deficits and stopped shipping them roubles. But it took months of recriminations to reach that point. It was only in July 1993 that Russia finally ended this idiocy and issued rouble notes with its own new post-Soviet designs.
Uzbekistan, the last country without its own currency, had to get out of the rouble zone and print its own notes and coins. But in the meantime, Russia experienced 3000 per cent annual inflation.
As republics started issuing their own currencies, they had to tear up every long-term sales contract, lease or loan agreement that involved companies in different former Soviet republics. The Russian companies insisted the contracts that had been denominated in roubles should stand, but the Ukrainian or Uzbek companies wanted to rewrite the contracts into their worthless local currencies.
Given these intractable legal disputes, and the odd local war, trade between the different parts of the Soviet Union virtually stopped. Output collapsed by 30 per cent in Russia and more elsewhere. Every factory manager I visited had a story about a component maker in another republic which was no longer delivering parts because of the currency exchange problems.
Given what ended up happening, it would have been much better if the Soviet republics had divorced quickly and issued their own currencies immediately. But in one sad similarity with the current crisis in the euro zone, no one was prepared to announce a divorce.
The Russians wanted to keep this last vestige of their empire intact, even if it cost them hyperinflation.
The other republics wanted to retain close links with the mighty Russian bear but refused to accept any budget discipline or to toe Russia’s political line.
Leaders pledged solidarity but acted in their own interests. It took a year-and-a-half, after all the other options had been tried, to break up the rouble zone. It did not help that for far too long, the International Monetary Fund thought it would be neater to keep the rouble zone intact.
I still think the Europeans, unlike the former Soviet republics, have the political solidarity to make a common currency work. I have first-hand experience of the collapse of a currency zone and it is to be avoided. But if they want the euro to survive, the leaders will have to move closer to a single economic federation. If they cannot, it would be better if they split up right away.
The risk is that the euro zone will repeat the rouble zone’s twilight, which lasted months and months, then fail just as tragically.