The Unraveling of the Soviet Ruble Zone
Part V of a Discussion on the Operational Details of Russia's Transition to Capitalism
Part of a series on the operational details of Russia’s transition to capitalism
The final days of the Soviet ruble zone read much more like heist than history.
The Soviet ruble fell because Russia was unable to propose a bargain enticing enough to keep the other former Soviet republics in the currency union. But how the Soviet ruble fell looked less like a series of failed roundtable talks, and more like a cyberattack or bank robbery followed by a titanic game of musical chairs where each player was a national-economy.
In a paragraph, here’s what happened:
The post-Soviet republics exploited inadequate access controls on the Soviet payment settlement network to rampantly issue new ruble stock to themselves as a way of kickstarting their budding market economies. They debased the Soviet Ruble so aggressively, that even Russia abandoned it. In fact, Russia abandoned its own currency before several other post-Soviet republics. So for a while many post-Soviets used a currency with no institutional backing. As each country successfully deplatformed from the ruble zone, their dead ruble stock would secrete out into the remaining economies, accelerating inflation.
This ended when Tajikistan issued a local currency to replace the Soviet ruble two whole years (!) after Russia had abandoned it.
If the above paragraph makes total sense, and the underlying details are either familiar or irrelevant to you, there’s not much more on offer here so you may as well stop reading now.
If, on the other hand, the above paragraph gives you either brain freeze or an itch of curiosity, then please—follow me.
Umbilically Connected
If you haven’t read the primer on Soviet banking, much of this post will not make sense. If you have, you know that the branches of the Soviet Gosbank, known as the Soviet monobank, were at the capitals of each of the Soviet republics. And as we discussed in the the prior section, the central banks of Russia and many other republics more or less started from bureaucratic mutinies mounted from within these regional branches.
These rolling bank mutinies let large slices of the Soviet financial system declare independence from the monobank. Its last remnants were finally swallowed by the Central Bank of Russia. But there was a problem: all the newly sovereign banks were still connected, almost by umbilical cord, to the former Gosbank branch in Moscow, which now was home to the Central Bank of Russia.
They still had access to the Gosbank intrabank, interbranch settlement network.1 And that settlement network had been designed to cater to a system where money was just a unit of account, largely between different organs of a single government.
Suddenly, that same payment network was now moving actual money.
And these newly seceded post-Soviet republics had newly birthed market economies in desperate need of a kickstart.
And thanks to the Gosbank policy of direct crediting virtual rubles at the branch level, these former regional branches had the organizational memory on how to run local credit allocation campaigns. And each was now a fully sovereign central bank, with the ability to unilaterally debit from the accounts of the Central Bank of Russia.
In July 1992, CBR tried to slow down the unilateral rubles debits by introducing credit limits for each post-Soviet central bank. Most central banks completely ignored the new guidlines (especially Ukraine), and hit their limits within 3 months.
To tighten the control system, Russia imposed a new restriction on countries exceeded their credit limits of non-cash rubles. They had a daily limit of cashless rubles debits, only to be used to settle invoices of imports into Russia, but the limit of the transfers was capped at the value of exports sent out from Russia.
This fractured the cashless ruble by national boundaries. The cashless ruble deposits in each country developed their own fair market value and traded at different rates to each other, despite ultimately sharing a common origin. Very weird.
There’s no “I” in Ruble
Russia tried to keep the new governments inside of a single ruble zone that it intended to lead. Initially many of the post-Soviet countries were open to this arrangement. (Aside: as a bit of foreshadowing, the Baltic states and Ukraine immediately announced they’d leave the ruble zone.)
The other states were open to a currency union where they could steer the formation of monetary policy. Russia, never the one to treat its neighbors like peers, refused to allow anyone else in the ruble zone to have any voice in monetary policy.
Throughout this process, the non-Baltic, non-Ukraine countries were of two minds as to whether to leave the ruble zone. They feared retribution from Russia and didn’t want to lose access to the legacy settlement system, which significantly eased cross border trade. Plus, they loved the idea being able to increase the money supply for their local economy while having the inflationary impact spread across all member states.
At the same time, they weren’t confident that Russia could stabilize prices, especially with the massive outflow or rubles from Ukraine as it left the ruble in 1992.
Russia’s proposition was: the CBR will be the site of issuing new currency, and the only institution involved in forming monetary policy. As it became clear that the ruble zone would just be the Russian Monetary Show, other countries began to introduce parallel currencies.
Alternative Currencies Sprout Up
Hyperinflation, as well as literal paper-and-ink-and-trucks-and-pallets capacity limits to money printing created a cash shortage across the ruble zone. Belarus, Moldova, and Azerbaijan rolled out “coupons” as a medium of exchange, to be used for common, large transactions like paying rent.
Belarus went to particularly great efforts to drive a higher percentage of cashless value exchanges. They issued checkbooks for high income individuals and requiring purchases of a certain size be made over check rather than cash.
And of course, governments began to introduce their own national currencies, issued to circulate in parallel with the ruble. If this seems chaotic, consider the times—total dissolution of the USSR—and the previous system (which itself had been dual currency).
The national currencies acted as a hedge against the ruble zone failing. By mid-1992, it became clearer that:
Russia couldn’t stabilize prices domestically (remember how we said it had never managed a free-floating currency?)
Russia was unwilling to cooperate on monetary policy with any other country in the proposed ruble zone
These two facts increased the expected value of a national currency. But adopting a national currency isn’t just a matter of policy, it’s also a matter of skill and capability. So in pursuing a national currency, each of the states began climbing a central banking learning curve. As they learned the ropes of how to manage a currency, the national currency pathway became increasingly valuable relative.
Russia (and then everyone else) Jumps Ship
Russia realized that diplomatic talks weren’t working to convince the other countries to agree to a ruble zone that it dominated.
So it announced in July 1993 that in about 2 months, it would demonetize from the pre-1993 ruble, and in favor of a new one. Any post Soviet countries were welcome to join the zone of the new ruble, if they realized that new currency emissions and monetary policy would only come from the CBR.
Immediately upon the announcement, Azerbaijan, Georgia, Moldova, and Turkmenistan left the ruble zone. The five remaining countries—Armenia, Belarus, Kazakhstan, and Tajikistan—expressed their desire to join the new ruble zone.
As countries exited the old ruble zone, their supply of old rubles would be used effectively a “free” tokens to pay for imports from countries still using the old currency. The result was a flooding of pre-1993 rubles into any country still using them, as fewer and fewer countries had to circulate largely the same supply of old rubles.
This had the strange effect of making other countries leave the pre-1993 ruble, after its issuer Russia had. The CBR would not or could not roll out the new ruble fast enough to outrun this flood. To save their economies, all of the last remaining countries began the issue of their own parallel currencies by November 1993.
Except Tajikistan.
Tajikistan took all of the circulating supply of pre-1993 rubles as every country exited. It went down with the ship. It would be nearly two years after every other country exited the ruble, in May of 1995, when Tajikistan finally adopted its national currency. It started its national economic story out with hyperinflation because of how slow it was to leave the ruble.
Lessons from Russia’s Bretton Woods
The collapse of the Soviet ruble zone is as strange as it is instructive. First off, it shows the importance of payment networks in shaping path dependencies. Much of the drama that unfolded was because of how hard it was to kickstart a banking system without access to the legacy Soviet payment rails. Not to mention those payment rails had been designed to issue money locally to the republic-level branches, but under Moscow’s name. When each branch was its own country, this turned into something like a pillaging of the faith and credit in Russian money.
Lessons for negotiating. The Central Bank of Russia, a kind of institutional antihero, was oddly willing to endure this attack on its currency from its neighbors. It thought this meant that they were still dependent on Russian banking and would ultimately be convinced to submit to Russian monetary policy.
While I wasn’t there, this seems like a negotiating position completely lacking in empathy, especially coming from a supposed monetary ally. It was much harsher than the position of the US at Bretton Woods. The US and Russia adopted similar positions at Bretton Woods and the ruble roundtable talks respectively, but the outcomes couldn’t have been more different. The US convinced the world to adopt the dollar as its reserve currency, while Russia destroyes its currency.
Lessons for state capacity. The pillage of the Soviet ruble happened because Russian central bankers couldn’t move fast enough to clamp down on ruble debit abuse. They were too slow to roll out access control or permissions workflows. Quite literally this was a failure of a product team that could not meet its shipping commitments.
The cash crisis that drove other countries to develop their own currencies came because of both hyperinflation and the CBR’s inability to issue enough cash rubles to keep all the activity happening within its neighboring economies inside of the monetary zone.
There’s a lot of logistical work that goes into managing and rolling out a currency, and these countries had no idea how to do this until CBR’s own lack of logistical excellence forced them to develop it.
And finally, you can see a rough pattern among the countries who stayed versus the countries who left the Russian ruble zone. The ones who left immediately were the Baltics and Ukraine. Well before they sought to join NATO, these countries struck Russia right in its monetary system.
I believe that they had access to the cardfile system. Though I can’t verify because I don’t speak Russian, let alone know where to access the necessary documents.