Mission impossible?
Weekend essay, January 30, 2022
“Everything under me will be like under my grandmother,” said the Russian Emperor Alexander I upon ascending the throne. This phrase was meant to draw a line under the short but tumultuous reign of his predecessor, Emperor Paul I, marked by the breakdown of the established order.
Sometimes it seems that Vladimir Putin would like to say something similar, only he can’t decide which of the past Russian/Soviet leaders he would like to take as an example. As a result, he takes something from Ivan the Terrible, something from Nicholas I, something from Alexander III, something from Joseph Stalin, and something from Leonid Brezhnev. But this approach cannot create a comprehensively stable, consistent system in which all elements are interconnected and the ideas expressed by the leader are put into practice. Much more often, we can see how the orders and wishes of Vladimir Putin hang in the air and are not embodied in actual changes.
One of the illustrative examples is his desire to take the Russian economy out of the zone of influence of Western currencies by refusing to use the dollar and the euro in foreign trade. Something similar existed in Soviet times when the bulk of the Soviet Union’s international trade was concentrated within the Council for Mutual Economic Assistance (Comecon). Within the Comecon, payments between countries were made without the use of Western currencies. Instead, they used an artificial supranational currency, the “transferable ruble,” and each Comecon country had its own “clearing” currency unit, which could be exchanged for the “transferable ruble.” All settlements using this unit were made in a specially established clearing center, the International Bank for Economic Cooperation. A system of agreed prices and centrally planned mutual supply of goods was used to balance the payments between the countries.
Of course, the Soviet economy needed new technology, food, and consumer goods, which required a real convertible currency, which the USSR received by exporting oil or raising loans. But until the mid-1980s, the volume of such imports was not very large. Economic problems in the USSR began in the second half of the 1980s, when a drop in world oil prices coincided with the accident at the Chernobyl nuclear power plant, with the growing costs of the arms race, with an ill-conceived anti-alcohol campaign, and with the loss of state control over the growth of nominal income. The swift deterioration of the economic situation led to a rapid accumulation of the country’s foreign debt and a drop in living standards, which became a decisive factor in undermining confidence in the authorities and a trigger for the collapse of the Soviet Union.
Since Vladimir Putin’s return to the Kremlin in 2012, the Russian economy has lost momentum, with an average annual growth rate of 1%, which, to a certain extent, makes the situation very similar to what happened to the Soviet economy in the first half of the 1980s. Just as then, Russia now is also engaged in a confrontation with the West; although so far military expenditures have managed to restrain rapid growth, the budget has substantial accumulated reserves, and the national debt is insignificant by any standards.
Nevertheless, memories of the past, of how dependence on the Western financial system can be a factor in a dramatic change in the situation, do not seem to leave Vladimir Putin. Not coincidentally, one of his first orders after the imposition of Western sanctions in the spring of 2014 was to limit using the dollar and the euro to pay for exports. For this purpose, a special law was passed that gave the government the right to demand that residents convert their payments into rubles.
Since then, the Russian President has repeatedly returned to this topic, demanding that the government solve the problem. However, little progress has been made: While in 2013, according to the Bank of Russia, the share of dollars and euros in payments for Russian exports was 88.7%, in the first three quarters of 2021, it was 83.7%. It is a relative success that the dollar’s share fell from 79.6% to 53.9%, but to some extent, this is due to the general trend of the increasing role of the euro in the global financial system.
Why is this problem not being solved? I see three main points.
First, more than 80% of Russia’s exports are raw materials and products of primary processing, which objectively leads to a concentration of exports. The combined share of the European Union, U.S., Turkey, Japan, and South Korea is over 55%. Companies-importers from these countries see few if any benefits from avoiding global currencies.
Second, Russia’s slow-growing economy, isolated from the rest of the world, does not have a strong demand for imports, resulting in a persistent current account surplus in the balance of payments. The Ministry of Finance absorbs this balance in the Sovereign Wealth Fund or by the population and the corporate sector of the economy, which build their savings outside Russia. In neither case can the ruble act as an instrument of investment.
Third, unlike the economy inside the CMEA, where settlements between companies were balanced at the interstate level, today Russia has limited clearing agreements with India and Vietnam. This means that companies-importers from China or CIS countries, which together account for a quarter of Russian exports, cannot rely on government assistance for their current activities. By deciding on the currency they are going to pay for Russian exports, importers assume all the risks associated with finding opportunities for short-term placement of funds and with fluctuations in the exchange rate of one currency or another. The Russian ruble is subject to sharp fluctuations related to changes in oil prices and, more recently, to developments in the foreign policy situation. This makes it unreliable to preserve value and reduces the desire to use it in foreign trade.