Focus LESSONS FROM THE COLLAPSE tries, Estonia, Latvia, and Lithuania, had already de- parted in August 1991. The formal division of the OF THE RUBLE ZONE Soviet Union occurred on 25 December 1991. It was clear-cut and rapid. Each new country kept all union ANDERS ÅSLUND* assets on its territory. The existing borders were rec- ognized and maintained. Russia accepted responsibil- When the Soviet Union collapsed in December 1991, ity for the Soviet Union’s substantial foreign debt, one single economic institution survived, namely the and assumed ownership of the far smaller foreign as- common currency, the ruble.1 The most radical Russian sets. Only two union institutions persisted, various reformers wanted to break it up, but they were defeat- Soviet military assets and the common currency, the ed by a multitude of opposing interest groups. As a re- ruble. sult, fifteen independent central banks started issuing ever larger ruble credits, which resulted in general hy- The Soviet economy had been out of control since the perinflation in 1992 and 1993, with annual inflation fourth quarter of 1990, as the Soviet economic system rates varying from 1,000–10,000 percent.2 In the fall of was falling apart. The economy suffered from all per- 1993, most countries left the ruble zone that ceased to ceivable ailments. Shortages of all goods and services exist when Russian departed. The countries that exited were pervasive, because of low state-regulated prices, the ruble the earliest, namely the Baltic states, per- while the government had lost control of both public formed the best, while the laggards suffered the most. expenditure and wages. Inflation was triple-digit, in spite of largely regulated prices and rationing was Many conditions at the end of ruble zone were pecu- wide. The Soviet budget deficit in 1991 was probably liar, but its collapse also displayed general features of 34 percent of GDP, but the Soviet national accounts a currency area. This extreme event can help us to dis- were not completed that year. The international cur- cern the mechanisms at work during the collapse of a rency reserves were literally depleted, and the USSR currency zone, especially when comparing with other had lost access to international financial markets be- similar events. Some of these developments are rele- cause of excessive public debt and large arrears. The vant for the Eurozone. Soviet economic system was collapsing, and GDP was falling by about 10 percent in 1991 (Åslund 1995 The first section of this article offers a brief presenta- and 2002). The situation was further complicated by tion of how the ruble zone collapsed. The second sec- the eleven newly-independent countries lacked cen- tion analyzes how the collapse of the ruble zone com- tral state institutions, notably central banks and min- pares with other currency zone failures. The third sec- istries of finance. The main problem, however, was tion draws overall lessons and specifically highlights probably a nearly complete dearth of economic points that matter for the Economic and Monetary knowledge everywhere apart from in Moscow and Union (EMU). Finally, what would happen if a debt- St. Petersburg. or country were to leave the Eurozone in distress? The curse of the ruble zone was that each of the 15 new republics had its own central bank that could What happened when the ruble zone collapsed? issue ruble credits. They had started doing so at the end of 1990, when the increasingly sovereign Soviet In December 1991, the Soviet Union broke up into republics established their central banks, but they twelve independent countries. The three Baltic coun- were caught in a prisoner’s dilemma. They would all be better off, if all of them restricted their issue of * The Atlantic Council, Wahington DC. money, but since they knew that the other central 1 I discussed this topic four years ago in Åslund (2012). 2 Hyperinflation is defined as inflation exceeding 50 percent a month banks would emit vast credits, none had a reason to for one month and the economy subsequently remaining in hyperin- flation for one year. hold back. CESifo Forum 4/2016 (December) 12 Focus An observer could have expected responsible politi- All of the former Soviet republics ended up on a tread- cians to stand up and call for an end to this hyperinfla- mill of rapid monetary expansion boosting inflation. tionary ruble zone, but its supporters overwhelmed its As prices surged, the velocity of money rose, so that opponents. The only people who really wanted to stop inflation increased more than monetary emission. the ruble zone were the Russian reformers around Inflation in the post-Soviet economies ranged from First Deputy Prime Minister Yegor Gaidar and the 640–3,000 percent in 1992, while in those economies Baltic leaders. In the fall of 1991, Gaidar (1993) had remaining in the ruble zone it ranged from 840– advocated a Russian ‘nationalisation of the ruble’. 11,000 percent in 1993. As hyperinflation caught on, The Western advisors of the Russian government con- GDP fell by 3–45 percent in 1992 alone. The Baltic curred, favouring a quick breakup of the ruble zone countries departed from the ruble zone in the summer (Lipton and Sachs 1993). This was also true of the of 1992, enabling them to restrain their credit issue. leading Western macroeconomists on this topic Even so, they faced inflation of around 1,000 percent (Sargent 1986) and Dornbusch (1992). in 1992, although that figure was much lower in 1993 (Åslund 2002). The post-Soviet republican leaders were painfully aware of their ignorance of monetary policy. The Not well-versed in monetary economics, post-Soviet countries most friendly to Russia – Belarus, Kazakhs - officials insisted that credits were not money, holding tan, Armenia, and Tajikistan – hoped for the survival back the printing of currency to impede inflation. The of the ruble zone and were prepared to submit to the printing presses were located only in Russia, which Russian central bank. The less friendly countries – started printing Russian rubles soon after independ- Ukraine, Moldova, Georgia, Azerbaijan, Turkmenis- ence. The other republics had to make do with their tan, and Uzbekistan – wanted to establish their own old Soviet ruble notes. Given that their printing had currencies, but after some time. In the meantime, they ended and prices skyrocket, cash was desperately wanted to benefit from cheap credit and raw materials short in supply. Several republics and regions started from Russia. The Balts took exception. They wanted printing their own coupons as a substitute currency. to establish their own national currencies and leave the While this was a great popular irritant, it was a side is- ruble zone as fast as possible, even if it would cost sue that did not have any great impact on monetary them greatly. Their saying went: “a national currency policy. is our best border fence to Russia” (Hansson 1993). Throughout the region, the old establishment fa- In the fall of 1992, the only one of the twelve coun- voured maintaining the ruble zone. The big state en- tries remaining in the ruble zone to hold back some- terprises wanted to sell without competition and be what was the Central Bank of Russia (CBR). Russia paid by the state through central bank credits. had current account surpluses with all of the other former Soviet republics, meaning that Russia provided Disappointingly, the international agencies involved financing to all of the other republics, which merely also preferred to keep the ruble zone. At this time, the repaid this with ruble credits issued by their central European Union (EU) was preparing for EMU, elab- banks. The IMF (1994) statistics for Russian financing orating on the Maastricht Treaty. Therefore, it sup- of the other former Soviet republics in 1992 are quite ported a joint currency zone. European interests dom- extraordinary. Russia financed 91 percent of Tajikis- inated the IMF, which sought a middle road of jointly tan’s GDP, 70 percent of Uzbekistan’s GDP and about agreed monetary policy without central control, but 50 percent of the GDP of Turkmenistan, Georgia, that option was never viable. Monetary discipline and Armenia. Belarus and Moldova received ‘only’ could only be ascertained if there was only one central 10 percent of their GDP. This cost Russia 11.7 percent bank solely responsible for issuing the ruble. (Sachs of its GDP of only 80 billion US dollars at the ex- and Lipton 1993; Åslund 2002) change rate of 1992. Impoverished Russia could not possibly continue this financing. The newly minted central bankers realised that the more credits they issued, the larger a share of the com- The Soviet Union had a highly centralised payments mon GDP they would extract. But presumably it was system, in which all payments went through the more convincing that friendly private bankers and com- Central Bank, which examined every single payment. modity traders were delighted to give them a commis- A handful of state banks had managed all payments. sion on the money that the central bankers lent them. The number of payments was limited because the 13 CESifo Forum 4/2016 (December) Focus number of state enterprises was not large, but as the the ruble zone by suddenly and independently declar- number of enterprises multiplied, payment delays ing all Soviet banknotes null and void at the end of surged. Nor did enterprises have any incentive to pay. July 1993. Panic broke out throughout the former Since they did not pay one another, they were all short Soviet Union as people queued up outside banks to of money. The arrears crisis was exacerbated by a use their old Soviet ruble banknotes.