July 12, 2008 (the date of publication in Russian)
A FACTOR OF SOVEREIGNTY
The ruble as a reserve currency: a political, not only an economic issue
The idea of making the Russian ruble a reserve currency, voiced by President Dmitry Medvedev at the G-8 summit in Toyako, Japan, is not new. It was discussed by Russian economists for a long time. In particular, Sergey Glazyev expressed it yet in 1990s. However, the initiative, long discussed in abstract terms, is today acquiring more concise political contours, and purports to acquire a major role in Russian strategic policy. It is hardly accidental that Dmitry Medvedev spoke out this idea a month before, in the framework of the St. Petersburg International Economic Forum.
Why has the long-standing idea of the ruble as a regional reserve currency exceeded the scope of academic discussion, becoming an important element of official rhetoric exactly now? And to what extent it is realistic?
The environment of today is really advantageous. The US dollar has been declining since 2002; lately, its decline has accelerated. Critical developments in the US financial sphere have already resulted in economic recession. Latest data indicate that the recession is going to spread to Europe as well. More and more professional economists, analysts, and investors share the impression that the financial crisis in the United States is becoming a permanent phenomenon. The overall flight of investors from paper holdings, especially nominated in US dollars, is an irrefutable fact. The same tendency is reflected in the soar of real economic assets like raw materials, fuel, and food. This circumstance is favorable for Russia now, with its excessively big sector of fuel and raw materials, and objectively leads to strengthening of the ruble. Naturally, when the investors are seeking for safe havens for their capitals, the ruble is likely to become one of them.
Thus, the question of principal possibility of the ruble's internationalization should be answered positively. However, the idea is expressed in a "bare" form. The public and the expert community are not acquainted with any detailed program of its implementation. We can only hope that such plans are under way. In fact, in order to implement the idea, a lot of things are to be done. The Central Bank, the Finance Ministry and diplomatic offices are to be committed for resolute measures. It is necessary to create, or at least to upgrade the necessary financial infrastructure, to adjust the payment system, etc.
A certain trend of strategic planning is already visible. Remember the unexpectedly harsh anti-dollar comments of Finance Minister Alexei Kudrin made at the IMF section in New York in 2007. Remember the remarks of President Vladimir Putin in his Address to the Federal Assembly, in which he proposed a partial transition to ruble trade at oil markets, along with opening a petroleum exchange in St. Petersburg. However, only a few new contracts can be converted into rubles: we have too many long-term and direct contracts. Still, this is a real step towards transformation of the ruble into a reserve currency. Unfortunately, I know nothing about any other specific moves in this direction. Therefore, it is too early to judge upon credibility of intentions and degree of maturity of relevant plans.
Simultaneously, we have to identify the area in which the ruble can fulfill the function of the leading reserve currency. In case we intend to make the ruble a regional currency, we have to identify the region. Obviously, this region doesn't coincide with the former borders of the USSR. To a certain extent, the initiative was more workable in 1990s when Russia's relations with CIS partners were better. However, the advantages were missed due to: the economic strategy of that time, based upon total dollarization of economy; absolute reluctance of the state from active development of a strong national financial system; illusions about superiority of the West and frenetic wish to integrate into the Western community "on equal terms"; the naive assumption that in exchange, Russia would be provided some kind of guarantees of its interests in the post-Soviet territory.
At present, the Baltic States are preparing for the transition to the euro, while Georgia and Ukraine are likely to refuse to assist in the desired internationalization of the ruble. Therefore, the new reserve currency is more realistic to be introduced in the frameworks of the Russian-Belarusian Union; the Customs Union of Russia, Belarus and Kazakhstan; the Eurasian Economic Community. Certain prospects are associated with the rest of the post-Soviet Central Asia, and possibly Armenia. In future, possibilities of infiltration of the ruble, along with other reserve currencies, into other (not only adjacent) regions are likely to open. But in order to reach this objective, the Russian Government should pursue serious, diligent and regular diplomatic activities. The future of the ruble as a reserve currency is not only an economic, but to an equal extent a political issue. Its solution wholly depends on efficiency of the integration process in the post-Soviet area.
Thus, the question on opportunities for practical implementation of the publicized idea may be also answered positively.
One more question: is this effort necessary for Russia? The implementation of the status of reserve currency and its further support is a complicated and vexatious job, suggesting increase of financial discipline and requiring systematic efforts. In fact, assiduous efforts are generally essential for Russian economic policy.
Besides, the successful implementation of the task promises Russia high benefits.
Firstly, the possibility to extract emission income is a direct economic benefit. The country that issues currency used by other nations can produce redundant amounts of currency and export it. The relevant international practice of the United States is now successfully used by the EU in the countries of North Africa, where the euro is becoming a parallel currency.
Secondly, emission of a reserve currency contributes to the state's political influence. The United States has been exercising "soft" geopolitical pressure by means of a developed infrastructure of USD-nominated loans. Though in the visible future, the ruble is unlikely to equal the US dollar's share in international monetary-credit relations, it is possible to make it a serious financial lever in most of the territory of the former USSR.
Thirdly, the ruble's functioning in the role of one of the reserve currencies would create additional possibilities for consolidation of Russia's economic and political sovereignty, and conclusively set the records straight in the issue of Russia's status of a regional superpower. It is well known that even this relatively moderate ambition of Moscow is contested and questioned by the United States and the European Union.
The elevation of the Russian currency's international role would be also essential for the morale of the population. Unlike the hyped though ephemeral "victories" of Russia on soccer fields and in pop-songs contests, internationalization of the ruble is likely to be perceived as a real and visible achievement of the nation, as an evidence of its revival, a proof of its potential, and a source of inspiration for further ascent.
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