Transition to Market

Chapter 7 The Realized Net Present Value of the Soviet Union

Vito Tanzi
Published Date:
June 1993
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Adrienne Cheasty

On December 25, 1991, the Soviet Union was dissolved. A cornerstone assumption of much public finance theory was undermined: the life of the government was not infinite. Following the demise of the Soviet Union, its executors were faced with closing the final balance sheet and valuing and distributing the estate—the assets and liabilities of the U.S.S.R. To those of us economists who have attempted to construct public sector balance sheets, it seemed an impossible task.1 This is how it was done.

Scope of the Task

The compass of public sector wealth is clearly laid out in Willem Buiter's ideal balance sheet of government (Table 1).2 Its asset side comprises: social overhead capital (nonmarketable); equity in public enterprises (partly potentially marketable); land and mineral assets (marketable); the present value of the future tax and social security contribution program; net foreign exchange reserves; and the imputed net present value of government's cash monopoly. Liabilities of government are: net debt denominated in domestic currency; net debt denominated in foreign currency; the stock of high-powered money; the present value of entitlement programs; and public sector net worth. These assets and liabilities were the legacy of the Soviet Union to its successor states: the challenge was to identify and distribute them.

Table 1.Stylized Public Sector Balance Sheet
(A1)Social overhead capital(L1)Net domestic-currency-denominated debt
(A2)Equity in public enterprises(L2)Net foretgn-currency-denominated debt
(A3)Land and mineral assets(L3)Stock of high-powered money
(A4)Present value of future tax and social security contributions(L4)Public sector net worth program, including social security contributions
(A5)Net foreign exchange reserves
(A6)Imputed net value of government cash monopoly

Making the Task Manageable: Precept of Territoriality

In the event, the newly independent republics drastically curtailed the need to value, and negotiate the disposal of, Soviet assets and liabilities by adopting a de facto principle of territoriality. According to this principle, assets and liabilities that could be identified as pertaining to, or emanating from, a particular state were in almost all cases assigned to that state.3

The main consequence of the espousal of territoriality was that little debate over the ownership or valuation of nonfinancial Soviet assets took place. Natural resources, strategic communications facilities, space program infrastructure, and other bodies that had been subordinate to the union reverted to supervision by republic-level or (perhaps more usually) local governments.4 Thus, practically all potential allocation and valuation difficulties concerning social overhead capital, equity in public enterprises, and land and mineral assets were sidestepped. Moreover, republican governments became the successor governments to the U.S.S.R. authorities, on their territory. The succession bore with it the implied responsibility of the new governments for the entitlements promised by the old, and the implied right of the new governments to collect the taxes exacted by the old. Hence, in Buiter's framework, the negotiable assets of the U.S.S.R. were reduced to net foreign exchange reserves and the imputed net value of the government's cash monopoly.

Closing Balance of the Soviet Union

The centralization of functions under planning permitted what was left of the U.S.S.R., after application of the territoriality rule, to be conveniently summarized in the balance sheets of three banks. The three banks, between them, had performed the fiscal and monetary functions of the Soviet authorities and managed Soviet financial assets and liabilities. Three committees of the successor states are at present supervising their orderly liquidation.

  • (1) The State Bank of the U.S.S.R. (Gosbank) had as its main asset the domestic state debt of the U.S.S.R. and, as its main liabilities, ruble issue and the deposits of the U.S.S.R. Savings Bank (Sberbank).
  • (2) U.S.S.R. Sberbank had acted as the conduit of household savings to finance the Soviet fiscal deficit. Practically its only asset was on-lending to Gosbank of all of the small savings it attracted. Practically its only liabilities were these savings deposits.
  • (3) The U.S.S.R. Bank for Foreign Economic Activity (Vneshekonom-bank) held the foreign exchange reserves of the U.S.S.R., and was the official obligor for U.S.S.R. external debt. It on-lent Soviet official borrowing to government and the enterprise sector in approximately equal shares.

Table 2 presents a stylized combined balance sheet for the three banks that now embody the Soviet Union.5 In a completely consolidated format, the Savings Bank would drop out of the table. What remains is the debt, domestic- and foreign-currency denominated, of the Soviet Union, and its backing. The rest of this paper, first, explains how these financial residues of the U.S.S.R. were valued, and are being disposed of; second, looks at the implications of their valuation for the solvency of the U.S.S.R. at the time it was dissolved; and third, identifies possible problems in their distribution that may delay a conclusive winding up of the Soviet Union.

Table 2.U.S.S.R.: Financial Assets and Liabilities(In billions of rubles)
Domestic debtSberbank deposits504
of U.S.S.R.887Ruble issue276
Union781Bonds and settlement
Loans to Cosbank504Savings deposits504
Foreign currencyLoans from banks, net103
debt of U.S.S.R.103Other net obligations8.8
Foreign exchange8.9Financial net worth0.1
Total assets1,502.9Total liabilities1,502.9

Convertible currency assets and liabilities are valued at rub 1.673 per U.S. dollar.

Convertible currency assets and liabilities are valued at rub 1.673 per U.S. dollar.

Domestic Currency Debt

The ruble-denominated debt of the U.S.S.R. amounted to rub 887 billion when the union was dissolved. Prior to 1991, all fiscal deficits had been incurred only at the level of the union: potential deficits of local or republican governments had been foreclosed by transfers from the union budget before the end of the plan year. Hence, the only part of the Soviet debt that could be attributed to identifiable states was that debt that was incurred during 1991, when republican governments were allowed to indulge in deficit financing. During that time, Russia ran up rub 74 billion in debt, and the other republics combined, rub 32 billion. Rub 781 billion remained to be divided.

The approach taken by the liquidators of Gosbank in allocating responsibility for the Soviet internal debt was to examine its backing. As shown in Table 2, the debt was financed largely by the use of the household sector's surplus (savings deposits of rub 504 billion) and by currency issue (rub 276 billion). Other sources of financing, bonds and unpaid bills, were comparatively insignificant–and (with the possible exception of commodity bonds) rendered more so by inflation in the months following the demise of the union.6

The virtue of approaching the distribution of the debt from the point of view of its ultimate creditors was that it permitted the principle of territoriality to be further extended: creditors could be identified by the state in which they lived. Though U.S.S.R. Sberbank had pooled the savings deposits of households across the union, full records remained of the savers. It was argued that each state should (and would, in its own interest) take responsibility for covering its own savings deposits. Likewise, since rubles had been issued to republics free of charge,7 it was argued that the original destination of the currency issue outstanding on December 25, 1991 provided an appropriate benchmark for identifying obligors for that part of the union debt that had been financed by printing money.8

Convertible Currency Debt and Reserves

The debt of the U.S.S.R. denominated in convertible currencies amounted to US$61.4 billion on December 4, 1991, of which US$53.7 billion had been contracted or guaranteed by Vneshekonombank (and was hence defined as official Soviet debt).9 Western creditors encouraged states to service the debt as an integral unit, rather than dividing responsibilities for parts of it. Hence, a sequence of several agreements led to a commitment by eight states (other than the Baltic states, Azerbaijan, Moldova, Turkmenistan, and Uzbekistan) to be “jointly and severally” responsible for Soviet debt.10 Each state (including nonsignatories) was allotted a quota for debt service, based on a formula defined on population, national income, and convertible currency trade in 1986-90. Should a state fail to meet its commitments, the others would become liable in its stead.11 In practice, Russia alone paid debt service in 1992.

The foreign exchange assets (reserves) of the U.S.S.R. amounted to US$5.3 billion at the end of October 1991 (equivalent to one month of convertible currency imports). Other less liquid foreign claims (such as clearing balances with members of the former Council for Mutual Economic Assistance) were more than offset by Soviet obligations: net debt on clearing accounts amounted to rub 8.8 billion.12

Solvency of the Soviet Union

The financial collapse of the Soviet Union can be seen in Table 3. Table 3 replicates Table 2, with the single difference that external assets and liabilities are valued at an approximation of their economic cost to the U.S.S.R. at the time of its dissolution (rub 100 per U.S. dollar). The depreciated rate contrasts with the insulated ruble accounting exchange rate of rub 1.673, that had been used by the managers of the Soviet economy in recording the transfer of resources to and from the rest of the world.13 The main effect of the revaluation is to multiply the ruble value of external debt by 60, so that it dwarfs all other items on the Soviet financial balance sheet.

Table 3.U.S.S.R.: Financial Assets and Liabilities, Revalued(In billions of rubles)
Domestic debt of U.S.S.R.887Sberbank deposits504
Union781Ruble issue276
States106Bonds and settlement
Loans to Gosbank504Savings deposits504
Foreign currency debtLoans from banks, net6,139
of U.S.S.R.103Other net obligations528
Foreign exchange532Financial net worth-6,032
Total assets2,026Total liabilities2,026

Convertible currency assets and liabilities are valued at rub 100 per U.S. dollar.

Convertible currency assets and liabilities are valued at rub 100 per U.S. dollar.

The counterpart of Vneshekonombank’s debt on its balance sheet was the loans it had made to finance the convertible currency operations of government, foreign trade organizations, and other state enterprises. However, since there was no mechanism for allocating exchange risk (and, for instance, collecting the ruble equivalent of the debt service from the nonfinancial sector), the offset to the valuation change in the debt (net of reserves) was, effectively, an equivalent reduction in the financial net worth of the U.S.S.R.14 According to this very stylized representation, the financial net worth of the Soviet state at the time of its dissolution was rub -6 trillion.

Obviously, this depressing figure must be interpreted liberally. Specifically, it would probably be more correct to describe Table 3 as showing the effect of the liquidity crisis that hastened the demise of the U.S.S.R. than as a depiction of the fundamental insolvency of Soviet territories.

For one thing, the individual states of the former U.S.S.R. are far richer than was the U.S.S.R. state in its final days. The retreat to territoriality was in itself one of the main reasons for the breakup of the U.S.S.R. The sequestering by republics, in 1991, of the income from their nonfinancial assets (of which convertible currency earners such as oil and gas exports and gold were a big portion) and of their net taxes stripped the Soviet balance sheet of its mainstay sovereign resources, leaving a bankrupt state with the negative net worth calculated above.15 Had the complete balance sheet described in Table 1 remained intact, and liquid, the fall in financial net worth would not have seemed terminal, placed in context of the vast real wealth of Soviet territories.

Moreover (and related to the intrinsic wealth of the former U.S.S.R.), the exchange rate used to value the foreign debt is not likely to be a purchasing power parity rate. Had the U.S.S.R. not been dismantled, thereby requiring a final balance sheet, many economists would have considered it a needless reflection of temporary volatility to revalue the Soviet balance sheet using the extreme current exchange rate. In one sense, the extreme exchange rate of the Soviet ruble represented the assessment of the market that the Soviet Government no longer had the authority to furnish real assets in order to meet its financial obligations.

Contentious Issues

The discussion so far gives the impression that the distribution of the assets and liabilities of the Soviet Union has been orderly and is now final. It has indeed been orderly and subdued, but possibly because the states have been too busy with short-term emergencies to pay attention to the process. Since few formal agreements have been signed, the possibility remains, on several fronts, that states will reopen contentious issues. The main identifiable contentious issues are the following.

  • (1) The offset of savings deposits against the union debt. This is the issue most likely to become inflammatory in the short run. Two objections are at present being raised to the principle that the states should take over responsibility for covering their own populations’ savings deposits as a way of distributing the burden of union domestic debt.First, states with higher historic savings rates argue that it is unfair that they should be left with a disproportionately higher debt burden.Second, many states want their savings deposits back now, while desiring to postpone discussion of the debt burden until the future. They claim their need has become urgent because increased migration and the combination of high inflation and repressed interest rates have led to runs on deposits that local savings banks have not been able to meet. The Russian authorities have, to date, resisted these demands, on the grounds that the repayment of savings deposits under present circumstances would imply the effective monetization of the entire stock of union debt.
  • (2) The offset of ruble issue against the union debt. The use of states’ shares of currency issue to allot to them shares of union debt has also raised at least two objections.First, states had differing rates of currency migration, depending on the structure of their trade and the relative sophistication of their financial systems. Some states argue that, in net terms, the stock of rubles outstanding on their territory is far less than measured by the original issue, and hence, that they should be allocated a correspondingly lower share of debt.Second, the treatment of the ruble stock in circulation at the time of the dissolution of the union has been enormously complicated by the announced intention of several states to secede from the ruble area. States that desire to maintain a common currency area argue that, unless states introducing their own currencies return all rubles to the ruble-area central bank, these rubles will become a claim on the resources of ruble-area countries–that is, a foreign asset of seceding states. In order to remove the incentives for seceding states to keep their rubles, ruble-area states would prefer to record the ruble stock as a claim (as well as a liability) of the ruble-area central bank on the states in which the rubles were issued. 16 However, if that treatment were accepted, the representation of the ruble stock as the backing for union debt would imply unequal treatment for seceding and remaining states: the former would acquire the debt but not the currency.
  • (3) The distribution of union gold. At the dissolution of the union, gold stocks were much lower than estimated by Western sources. 17 What stocks there were were distributed among producer states, on the argument that the gold was an inalienable part of their physical assets. 18 Other states (particularly the Baltic states), whose stocks had been centralized in Moscow, have not ratified this distribution.
  • (4) The distribution of external assets. Since the joint and several accord on states’ liability for external debt has not resulted in debt service by any state other than Russia, tentative proposals have been made that Soviet external assets be transferred to Russia in return for Russia’s adopting full responsibility for Soviet debt. (The main identifiable such assets are embassies and holdings in Vneshekonombank subsidiaries.) Some states have been reluctant to pursue this, in the belief that external assets (which have never been comprehensively audited) are large.19 The distribution of external assets–obviously not subject to resolution by recourse to territoriality–is most likely to require the application of the difficult and contentious valuation techniques the executors of the Soviet Union have avoided so far.
  • (5) The shortcomings of territoriality. Some states have objected that the Soviet budget, including revenue from all parts of the U.S.S.R., was the main investor in the physical assets of Soviet territories. Hence, they argue that the application of territoriality could lead to significant injustices, particularly when “lucky” states take possession of large indivisible assets, such as space centers and steel mills that were paid for in part by other states.20

Objections to territoriality are intensified by application of the traditional Marxist critique that the center exploits the periphery. Some states contend that, as a general rule, investment was concentrated in certain metropolitan areas. More fundamentally, they posit that the static production and trade patterns imposed by planning were immiserizing for peripheral states. If the periphery was a net loser from the Soviet Union, then, they argue, those who gained (the metropolitan areas–principally Russia) should take full responsibility for all Soviet debt.21


Despite the many outstanding issues, it is to the credit of all of the states of the former Soviet Union that the distribution of Soviet assets and liabilities has been handled so far with temperance, and with the pragmatism that generated the minimalist approach of territoriality.

Time, and inflation, are the most likely disposers of what remains.

    BlejerMarioI. and AdrienneAdrienne“The Measurement of Fiscal Deficits: Analytical and Methodological Issues,”Journal of Economic LiteratureVol. 29 (December1991) pp. 164478.

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    BeanCharlesR. and WillemH. BuiterThe Plain Man’s Guide to Fiscal and Financial Policy (London: Employment Institute1987).

    BuiterWillemH.“Measurement of the Public Sector Deficit and Its Implications for Policy Evaluation and Design,”Staff PapersInternational Monetary FundVol. 30 (June1983) pp. 30449;reprinted in How to Measure the Fiscal Deficited. by MarioI. Blejerand AdrienneCheasty (Washington: International Monetary Fund1993).

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    International Monetary FundThe Economy of the Former U.S.S.R. in 1991 (Washington: International Monetary Fund1992).

Adrienne Cheasty is a Senior Economist in the European II Department. She is indebted to Vito Tanzi and Wilhelm Nahr, without whom this paper would not have been written, and to Willem Buiter for valuable insights.
1For the definitive statement on the impossibility of valuing a government, see Blejer and Cheasty (1991), especially pp. 1669-75.
3There were probably two reasons underlying the recourse to territoriality: on the part of Russia, the desire to minimize disruption and the scope for conflict among the states; and on the part of some other states, a feeling of incapacity to change the de facto apportionment. However, since all agreements on the subject of sharing assets and liabilities remain in draft (other than that on external debt), some exceptions to allocation by territory may eventually emerge.
4In the U.S.S.R., there were three classes of organizations (a concept covering both administrative bodies and enterprises): union-subordinate, covering activities deemed of strategic importance to the whole U.S.S.R. (such as fuel and energy, steel, the space program, and most defense); republic-subordinate, covering the major nonunion enterprises and governmental functions in each republic; and local-subordinate, covering mainly services (such as distribution) and social welfare functions.
5In order to preserve the confidentiality of unfinished business, only those figures that have been published are shown here. However, the presentation of a more detailed balance sheet would not change the analysis of the paper or the orders of magnitude being discussed.
6It happened that the U.S.S.R. banking system was left with net deposits (unsettled balances or “unpaid bills”) in the settlement system when the Gosbank balance sheet was closed. Because of the automatic and consolidated nature of the settlement system under planning, the obligees of these balances may never be identified.
7All seigniorage went to states, because Gosbank shipped currency upon proof of need, without recovering even transport costs.
8To put this in the context of Buiter’s balance sheet: at the time the Soviet Union was liquidated, the value of the Government’s cash monopoly was equal to the existing stock of high-powered money.
9Nonguaranteed debt is also treated as a Soviet, rather than a state-level, liability.
10For a chronology of these agreements, see International Monetary Fund (1992), Annex 2, pp. 91-92.
11The largest shares were those of Russia (61 percent) and Ukraine (16 percent).
12The value of this figure depends crucially on the exchange rate used. In principle, the fact that the U.S.S.R. has been dissolved means that the prevailing exchange rate at the time it ceased to exist is the correct rate for valuing external assets and liabilities. That rate was rub 1.673 per U.S. dollar–though the claims were recorded, where appropriate, at a rate of rub 5.884 per U.S. dollar. In practice, debates with partners about the valuation of these claims (particularly in transferable rubles) continue.
13Even the accounting rate of rub 1.673 per U.S. dollar represented a near threefold devaluation compared with the official rate of rub 0.6 per U.S. dollar used by Vneshekonombank.
14One interpretation would be to consider it the cumulative net cost of subsidizing the ruble exchange rate at an unsustainable level for several decades.
15Bean and Buiter (1987), p. 32, put the point well: “While … there is nothing especially virtuous about maintaining net worth intact, it is certainly of interest to trace the evolution of net worth over time, since this will determine the future fiscal elbow room of the authorities.” The major manifestation of the Soviet financial crisis was the inability of the Government to continue to balance its budget while insulating the domestic economy from the rest of the world via extensive depletion of real wealth, as it had always done in the past.
16To use Buiter's terminology, they see the seceding states’ rubles as an intrinsic part of the government’s cash monopoly.
17It was argued that gold had been used over several years to finance implicit fiscal deficits and thereby postpone an announcement of the unsustainability of the Soviet state’s financial position.
18This is a generous interpretation of the de facto outcome of a politically difficult process.
19Tables 2 and 3 include Vneshekonom bank subsidiaries, as valued in the Sovier accounts.
20If capital goods’ prices in the U.S.S.R. had been close to world prices, records of state budgets and transfers among states could conceivably be disentangled to assess the extent of “imbalances” in investment. However, the erratic undervaluation of Soviet capital makes this impossible.
21This particular debate transcends the question of Soviet assets and liabilities. Peripheral states argue that Russia has an obligation to finance in full its structural trade surplus with other states, since the structure of trade was set by Moscow planners.

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