Money and Banking Statistics in Former Soviet Union (FSU) Economies

This paper addresses the major issues concerning the compilation of money and banking statistics for the fifteen republics of the former Soviet Union (FSU), including (1) the treatment of ruble currency circulation and (2) the classification of claims on FSU financial institutions. The paper proposes the use of a monetary authorities’ account to encompass both the domestic and foreign aspects of ruble currency circulation and a classification scheme for monetary accounts that permits the construction of analytically meaningful monetary aggregates. These issues are addressed within an analytical framework that transforms the Gosbank Accounting System into monetary statistics broadly consistent with the Fund’s methodology.

Abstract

This paper addresses the major issues concerning the compilation of money and banking statistics for the fifteen republics of the former Soviet Union (FSU), including (1) the treatment of ruble currency circulation and (2) the classification of claims on FSU financial institutions. The paper proposes the use of a monetary authorities’ account to encompass both the domestic and foreign aspects of ruble currency circulation and a classification scheme for monetary accounts that permits the construction of analytically meaningful monetary aggregates. These issues are addressed within an analytical framework that transforms the Gosbank Accounting System into monetary statistics broadly consistent with the Fund’s methodology.

I. Introduction

This paper addresses the major issues concerning the compilation of money and banking statistics for the fifteen republics of the former Soviet Union (FSU). Its focus is immediate and practical, namely, how to construct analytically meaningful monetary statistics for these newly formed countries that were, until recently, part of a centrally planned economic system. The need for such statistics is compelling, in view of the efforts of these countries to introduce market-based economic institutions and policy structures that rely on indirect means to influence economic and financial developments. In addressing this need, the Fund staff have drawn upon their experience in dealing with the centrally planned economies of Eastern Europe over the last decade, as well as the knowledge acquired in assessing the problems and prospects of the economy of the former Soviet Union.

The approach adopted in this paper to the compilation of monetary statistics emphasizes the uniformity of treatment across all FSU republics, in part because of the common system of accounts found in each republic and in part because of the need to coordinate economic policies among these countries. In particular, for those countries that remain within the ruble area, uniformity of treatment of the monetary accounts will greatly facilitate the establishment and implementation of monetary policy rules for the ruble area as a whole. At the same time, an attempt has been made to allow for variation among the republics; indeed, the paper documents that some variations already have occurred among the republics and variations are likely to continue. Moreover, such variation is accommodated easily within the methodological framework developed herein.

This paper presents an interim solution to the problem of compiling monetary statistics in the FSU republics, i.e., it adapts the existing system of accounts to the requirements of the Fund’s methodology for MBS. This approach will assist the authorities in these countries to formulate and implement stabilization programs that require close monitoring of economic and financial aggregates. In the longer run, the implementation of new accounting systems and reporting frameworks will further facilitate the compilation of monetary statistics.

In adapting the existing accounting system to the requirements of the Fund’s MBS, it is important to understand the workings of the former Soviet financial system that gave meaning to the classifications contained in the accounting system. This knowledge is particularly important in addressing the issues posed by the liquidation of the FSU financial institutions (Gosbank USSR, Sberbank USSR, etc.) and its impact on the balance sheets of successor institutions in all of the former republics. Therefore, Section III of this paper discusses the workings of the FSU financial system, including the reforms introduced in 1987-88 to increase competition. Section IV begins with a discussion of the major conceptual issues involved in adapting Soviet financial statistics to the Fund’s methodology and concludes with a proposed methodological framework for achieving this purpose.

II. The Soviet Financial System 1/

1. The “credit plans” and the “cash plan”

Although the Soviet financial system was an integral part of the planning process, Soviet financial institutions did not play the role of financial intermediaries. Instead, the allocation of credit flows was determined by the central plan for physical goods and implemented through government administrative controls. In this context, the banking system functioned in the absence of credit and capital markets as a conduit through which the financial side of the “real” plan was implemented.

The financial flows directed towards the enterprise sector were regulated by the so called “credit plans” of the central bank (Gosbank USSR). These credit plans were simply the counterparts of the quantitative production plans: the credit granted to each enterprise was based upon its production targets and long-term investment needs. Credit granted for short-term working capital was determined under the short-term credit plan, whereas long-term investments were funded under the long-term credit plan and largely financed from budgetary transfers. Enterprise profits were remitted to the budget; however, certain deviations from plan targets, such as short-falls of profits, were financed by the Gosbank, thus providing some indirect financing from the central bank to the budget. Therefore, the amount and types of credit extended to the enterprise sector were independent of the factors that normally influence credit decisions in a market economy, in particular the creditworthiness of borrowers and the risk and return preferences of savers.

While the credit plans determined the amount and direction of credit in the banking system, another plan, called the currency emission or “cash plan” of the Gosbank, determined the supply of liquidity to the household sector. The enterprise sector was forbidden to hold cash except to make wage payments. Households received their money incomes in cash and made almost all purchases in cash; credit facilities available to the household sector were severely limited. The Savings Bank (Sberbank) provided the household sector with an alternative financial asset, namely, deposits; in addition, there were long-term government bonds. The Savings Bank redeposited these funds with the central bank, where they became available for use by the Government. Therefore, the thrust of financial policy was to direct household cash into the banking system where it became, in practice, a resource available to the government to finance its operations. 1/

2. The structure and operations of Soviet financial institutions

a. The period prior to the 1987-88 reforms

In the Soviet financial system prior to the reforms introduced in 1987-88, the Gosbank performed the functions of a central bank, except the management of international reserves, and most of the functions of a commercial bank. As the central bank, the Gosbank was responsible for the overall direction of liquidity and credit resources in the economy (cash and credit plans). The Gosbank also was banker to the government and lender to the enterprise sector.

In this period the payments system was geared to the recovery of the cost of production of the enterprise sector, i.e., the recovery of all input and transfer payments, including wages but excluding taxes. Therefore, an enterprise would receive payment for the sale of goods from the bank (the local branch of Gosbank) upon documentary evidence that goods had been shipped. These documents would then be sent to the local Gosbank branch of the purchaser, which would then debit the purchaser’s account. However, owing to delays brought about by the transmission of documents through the mail, the payor’s account was often not debited until several months after the shipment of the goods. As a result, the payments system generated a substantial credit position in the banking system in favor of the enterprise sector, because debits lagged credits.

In addition to the Gosbank, there were three specialized banks in operation in the period prior to the 1987-88 reforms: these were the Savings Bank (Sberbank), the Construction Bank (Stroibank), and the Bank for Foreign Trade (Vneshtorgbank). The primary function of the Savings Bank has been described above. In addition, the Savings Bank undertook some small-scale lending to the household sector. The Construction Bank was formed to provide long-term investment credits to enterprises, in order to gradually replace budgetary transfers. All foreign exchange operations were conducted on behalf of the state by the Bank for Foreign Trade, which also managed the international reserves and extended credit to enterprises responsible for foreign trade.

b. The 1987-88 reforms and institutional changes

The reforms of 1987-88 were intended to introduce a two-tiered banking system in which the commercial banking functions performed by Gosbank would be concentrated in the newly created specialized banks. Three new specialized banks were established--the Agricultural Bank (Agroprombank), the Industry and Construction Bank (Promstroibank), and the Social Investment Bank (Zhilsotsbank)--to channel credit to enterprises in their respective sectors. (The former Construction Bank was renamed the Industry and Construction Bank.) These banks, therefore, assumed all the commercial banking functions previously performed by Gosbank, including taking deposits from, and granting credits to, enterprises. Moreover, the specialized banks also acted as agents for the government; therefore, a full list of Union, Republican, and local government accounts was carried in the books of each specialized bank, as well as in the former Gosbank. The two existing banks--the Savings Bank and the Bank for Foreign Trade (renamed the Bank for Foreign Economic Affairs) continued their former operations.

In conjunction with these reforms, the 1988 Law on Cooperatives authorized the establishment of cooperative banks to service the needs of cooperative enterprises not served by the state-owned specialized banks. In addition, state enterprises were granted the right to establish their own banks. These commercial and cooperative banks (CCBs) differed significantly from the specialized banks. First, their activities were relatively unrestricted; they could grant both short- and long-term credits, accept deposits, and engage in foreign exchange operations. Second, their customers were not limited to a particular sector of the economy; these banks were free to service both households and enterprises across all sectors of the economy.

Along with the transfer of commercial functions from the Gosbank to the specialized banks and the establishment of the new cooperative and commercial banks, the reforms brought about a major change in the operation of the payments clearing system. Under the revised system, the initiation of the payments clearing process began with the purchaser or payor rather than with the seller of the goods. When the purchaser of goods notified his bank to make payment to the seller, the bank immediately debited the purchaser’s account. Inevitably, however, problems were experienced with this system as well: the crediting of the seller’s account was usually considerably delayed, owing to administrative and other problems. As a result, the operation of the payments system slowed, and a very large debit float developed, i.e., a net liability of the banking system to the enterprise sector.

3. Reporting and accounting systems

The Gosbank devised three separate accounting systems for financial institutions in the FSU. The “Plan of Bookkeeping Accounts at Banks of the USSR and Commercial and Cooperative Banks,” hereinafter referred to as the Gosbank standard accounting system, was devised first for the Gosbank’s own operations. After the 1987-88 reforms, it was extended to cover the operations of the specialized banks that were created from the breakup of Gosbank and the operations of the newly created cooperative and commercial banks. The standard system was supplemented by two additional accounting systems for, respectively, the Savings Bank and the Foreign Trade Bank. Moreover, transformation keys were developed, which enabled the accounts of these Banks to be consolidated with those of the rest of the banking system at the Union level. In the first six months of 1992, the accounting conventions of the standard system were modified to some degree in the various republics; nevertheless, the basic structure and rationale of the accounting system has remained the same.

The Gosbank system is a highly detailed accounting framework for reporting by banks that reflects the administrative regulation and control of the banking system prior to the introduction of market reforms. A summary of the major accounting codes and headings is presented in Table 4 (Appendix). Each account is designated by a three-digit code, with the first two digits indicating the broad class of accounts, e.g., accounts ranging from 010 through 019 are designated for banks’ capital, while accounts ranging from 070 through 079 are used for foreign currency transactions. The same account number was used for both asset and liability accounts, and not every type of account could be opened at every bank; some accounts were used only at Gosbank and at the specialized banks, whereas others applied only to the commercial banks.

The standard system permits a separation of accounts along sectoral lines that is broadly consistent with the Fund’s MBS methodology. There is sufficient detail to separate the various levels of government from the enterprise and household sectors (see Table 4 Appendix). The system permits the identification of government accounts at the level of the former Union, republic, and local government, as well as extrabudgetary funds operating at the various levels of government, in particular price subsidy funds and pension funds. Enterprise accounts are differentiated by major branches of industry such as construction, energy, transportation, etc.

The accounting system was used to monitor the financial side of the central plan, including the operations of the government sector. In this respect, the procedures for accounting for government transactions differed from those applied to the enterprise and household sectors. The major government accounts (090 and 110 for the former Union government and 100 and 120 for the republican governments) represented government revenues or deposits--a liability of the banking system to the government--and government expenditures--a claim of the banking system on the government. However, all government expenditure was financed by credit and not by a drawdown of deposits. At the end of each year the government’s accounts throughout the banking system were cleared, and any net position was transferred to Gosbank; most recently, with the establishment of independent states these net government positions have been transferred to the accounts of the respective republican national banks.

In terms of the Fund’s MBS methodology, however, the standard accounting system has a number of weaknesses, foremost of which is the failure to distinguish accounts on the basis of the residency of the transactor; the system separately identifies only foreign currency accounts, some of which are with residents. 1/ Another weakness is the overlap between the government and enterprise sectors with respect to long-term deposit accounts--170s and 180s--used to fund capital investments. These accounts can reflect a combination of government and enterprise deposits set aside for long-term investment projects, and therefore the attribution of these accounts to one sector or the other may be problematic.

The Gosbank maintained a system of regional branches that were linked to computer centers for purposes of aggregating the detailed accounts of individual banks on a monthly basis. Therefore, an aggregated balance sheet for the banks in each republic, excluding the Savings Bank and the Foreign Trade Bank, was compiled each month. The balance sheets of the Savings Bank and the Foreign Trade Bank were compiled using a different accounting system; in the case of the Savings Bank, however, aggregate balance sheets were produced quarterly, rather than monthly, owing to the extensive network of small branches operating in each republic and the lack of modern computer facilities.

4. Soviet monetary aggregates

Soviet monetary and credit aggregates were designed to monitor performance under the central plan; consequently, their usefulness for monetary analysis in the period of transition to a market economy is limited. These aggregates included accounts drawn from the balance sheets of the banking system as well as off-balance sheet indicators of household wealth, such as government bond holdings and life insurance reserves. Moreover, certain long-term deposits of the enterprise sector were not included in the measures of money, because these funds were earmarked for investment projects.

The monetary aggregates consisted of four definitions of money or liquidity: MO consisted of currency in circulation and some vault cash; Ml included MO plus the transferrable deposits of enterprises and the sight deposits of households with the Savings Bank; M2 included M1 plus the time deposits of households with the Savings Bank; and M3 included M2 plus life insurance reserves and other measures of household wealth such as holdings of government bonds. These distinctions, however, were somewhat artificial, in that they did not adequately reflect the liquidity of the various components; e.g., although enterprises maintained substantial deposits in their current accounts, the use of these deposits was restricted, and moreover enterprises could not legally hold cash balances.

The amount of Currency in circulation was linked directly to the system of wage payments (see discussion of the cash plan above) and did not reflect liquidity preferences of households. Incomes of the household sector were paid mainly in cash that was recaptured by the banking system through the Savings Bank. Each branch of the former Gosbank kept an exact record of the currency it issued; however, the currency in circulation in each republic could not be derived from the records of the Gosbank branch because of net currency flows between the republics. Therefore, Gosbank (USSR) made separate estimates of currency circulation in each republic, based on accumulated flows of goods and income between republics and the amount of currency absorbed by the Savings Bank in each republic.

Deposits in the Soviet financial system were more restricted in their use than those held with the banking system in a market economy. Household deposits were held mainly with the Savings Bank of the respective republic and were classified as sight or time deposits. Sight deposits could be used in a limited sense to make payments and, therefore, were classified as part of demand deposits and included in M1. Time deposits were held for fixed periods and were included in M2. Enterprise deposits included in M1 were related to the working capital of the enterprise and were exclusive of long-term deposits set aside for investment purposes. These long-term deposits were netted against long-term credits for investment purposes and reflected in the credit aggregates. Deposits of local governments and pension funds were excluded from money supply; this exclusion would be in line with MBS methodology, if these levels of government did not have their own significant sources of revenue and, therefore, were dependent on the Union or republican budgets.

5. The Minsk and subsequent agreements on currency issue and inter-Republican monetary relations

After the dissolution of the FSU and Union-wide financial institutions in 1991, independent central banks 1/, including the Central Bank of Russia (CBR), operated in each of the FSU republics; these central banks were established from the branches of the Gosbank (USSR). Although these central banks were nominally independent, they did not perform various functions normally attributed to an independent central bank, e.g., they did not issue and manage their own currency, manage the republic’s foreign exchange reserves, or, except in the case of the CBR, oversee the operations of the payments clearing system.

The interbranch Settlement System (MFO from its Cyrillic acronym) continued to operate throughout the FSU republics during 1991; this system functioned for both intra- and inter-republican clearings between banks. Each republic was divided into a number of regional centers that cleared payments both within the region and between regions, including regions in other republics. The MFO system operated through account numbers 83* to 89* in the standard accounting system and used highly detailed cross-checking procedures that often resulted in substantial delays in payment. 1/ The MFO System also recorded all other inter-republican transactions between banks, including transactions associated with the issuance of currency by the former Gosbank (see Section IV.2 below).

As of January 1, 1992, the CBR decided to centralize the payments clearing system for inter-republican transactions by the use of correspondent accounts with each of the central banks in the former republics. This action was designed to exert more control over inter-republican clearing operations. The arrangements for a centralized clearing system were finalized in the Minsk Agreement of early January 1992, which also established the Common Currency Arrangement (CCA), whereby members of the ruble zone could obtain rubles through correspondent accounts between their republican central banks and the CBR (see Section IV.3, p. 25 below).

III. The Adaptation of Soviet Financial Statistics to MBS Methodology

Although it is possible to adapt the Gosbank accounting system to the requirements of the Fund’s MBS methodology, questions arise concerning the meaning of such statistics during the period when major elements of the centrally planned economy were still in operation, i.e., for the period up to the end of 1991. Therefore, Part 1 of this section addresses issues that relate to the meaning and use of monetary aggregates derived from historical data. Part 2, on the other hand, is concerned with the compilation of monetary statistics for FSU republics beginning in 1992, when these countries started to dismantle the centrally planned economy and to introduce market reforms. Therefore, Part 2 deals with MBS issues that arise in the context of FSU economies, namely, ruble currency issue that is not on the balance sheets of the republican central banks and claims of republican financial institutions on FSU financial institutions. Part 3 presents the methodological framework that has been developed for adapting the Fund’s money and banking statistics to the FSU economies.

1. Interpretation of historical data

Section III described the passive nature of monetary policy under the centrally planned economy and the use of the accounting system to monitor plan performance. To achieve their objectives, the central authorities imposed severe restrictions on the use of financial instruments by both the household and enterprise sectors. Cash also served a different purpose than in a market economy, because it did not represent purchasing power over goods, which in many cases were severely rationed. Households enjoyed only limited access to their deposits, and these were not transferable by check. The enterprise sector could not hold cash, except to pay salaries, and current account deposits (transferable by payment order) were limited to working balances. Longer term deposit accounts of enterprises were earmarked for investment, and access to these funds was restricted. These restrictions were intended to maximize the reflow of cash through the banking system to the government sector via Savings Bank loans to Gosbank. On the credit side, Gosbank segmented the types of credit extended to the enterprise sector, drawing a major distinction between short-term or working capital loans, which were closely geared to the production targets of the plan, and long-term loans for investment in plants and equipment. Moreover, the granting of credits bore little or no relationship to the credit-worthiness of the borrower and was not constrained by banks’ ability to marshal financial resources.

In view of the highly detailed structure of the Gosbank accounting system (see Table 4 Appendix), it is possible to construct historical money and credit aggregates that approximate in coverage those employed in the Fund’s MBS methodology. However, the relationship of these aggregates to measures of macroeconomic activity is not helpful in determining the future behavior of such aggregates, given that both institutional structures and financial instruments have been undergoing substantial changes since the beginning of 1992. Thus, for example, household demand for cash, relative to bank deposits, is likely to change substantially when the “moneyness” of such deposits is increased through the introduction of transferable instruments such as checking accounts; moreover, the demand for different types of money balances will be affected by financial reforms aimed at establishing positive real rates of interest on bank deposits. Similarly, the demand for credit is likely to be affected by several factors not present in the previous system, in particular the charging of a real rate interest on bank loans. Therefore, time series data on money and credit aggregates for the period through 1991 would be of limited usefulness in monetary analysis and policy formulation.

2. Methodological issues in adapting Soviet financial statistics to MBS

a. The treatment of currency in the monetary accounts of FSU countries

(1) Introduction

The treatment of ruble currency in the monetary accounts of FSU republics poses problems for the compilation of monetary statistics, because ruble currency in circulation does not appear on the balance sheet of the republican central banks. 1/ This situation reflects the fact that, until 1991, the now independent central banks in each of the FSU republics were branch offices of the former Union Gosbank, and, therefore, currency emission was recorded as a liability of Gosbank (USSR) and not as the liability of the individual branches. 2/ The Issue Department of the Gosbank (USSR) recorded increases in currency issue on account 020 (liability) and a corresponding increase in interbranch claims on the republic receiving the currency (e.g., account no. 834 for Belarus). The branch receiving the currency would record an increase in interbranch liabilities via account no. 830, with the Issue Department as Gosbank (USSR), and a corresponding increase in cash in vault (account no. 030) for the same amount. 3/ Thus, if the accounts of the Issue Department were consolidated with those of the branch, only two entries remained, namely, currency emitted (020) and cash in vault (030), because the interbranch credits and debits would cancel.

These procedures for currency emission continued even after the former Gosbank branches in the republics became independent central banks. Moreover, currency issue remained the responsibility of the Issue Department of the Gosbank (USSR) until the end of May 1992; after that date the CBR assumed the full liability for all rubles circulating both within the Russian Federation and in the other FSU republics. 1/

The ruble currency issue was not backed by gold or financial instruments but rather by interbranch claims under the FSU government and, more recently, by inter-republican claims. A republican central bank currently receiving rubles, therefore, accepts the incurrence of a foreign liability 2/ that is now recorded in the accounts of the Issue Department of the CBR. Therefore, a consolidated statement of the banking system for a republic would show only deposit money, given that rubles in circulation are not recorded as the liability of the respective republican central bank. This situation raises problems for monetary analysis and financial programming, because such a consolidated balance sheet would not give a complete picture of developments in the money and credit aggregates within the economy. Therefore, for analytical and policy purposes, estimates of currency in circulation are needed to augment the data compiled from the banking system.

The accounting practices described above introduce an asymmetry between the accounts of central banks in other FSU republics compared with those of the CBR. The accounts of the CBR reflect a foreign liability, namely, rubles in circulation outside the Russian Federation, and a corresponding foreign asset, the inter-republican claims. The accounts of other FSU central banks, on the other hand, while initially showing both a foreign asset (cash in vault) and a corresponding inter-republican (foreign) liability, would eventually show only the foreign liability, because cash in vault is exchanged for domestic assets. Therefore, current accounting procedures suggest an implausible change in the net foreign asset position for the ruble area as a whole, arising from the process of currency emission from the CBR to the other republics.

(2) The monetary authorities’ account

It is possible to account for the rubles in circulation in each of the FSU republics within the framework of the Fund’s MBS methodology through the introduction of the monetary authorities’ account. This account is a functionally defined concept, which embraces the key elements of monetary operations and policy within an independent country. Under the Fund’s methodology, the monetary authorities perform five major functions, namely: 1) provide and manage the economy’s basic means of payment, or currency and coin issue; 2) manage the economy’s international reserves, which are the basic means of payment for international settlements; 3) act as banker and financial agent to the government; 4) act as banker to the country’s commercial banks, holding statutory reserves and providing short-term lending facilities and, in some cases, clearing facilities for interbank transactions; and 5) manage domestic money and credit policy. Also, in many countries the monetary authorities serve as regulator of the banking industry.

However, in certain countries some of these monetary authorities’ functions are performed by institutions other than the central bank. In these cases, the Fund’s methodology consolidates the parts of the balance sheets of those institutions relating to monetary authorities’ functions with the balance sheet of the central bank to form a monetary authorities’ account. In practice, the most frequent instance of this consolidation occurs when the Treasury is responsible for coin issue, while the central bank issues banknotes. In this case coin issue is recorded as a liability on the balance sheet of the monetary authorities’ account, with a corresponding increase in the monetary authorities’ claims on government. 1/ Therefore, the monetary authorities’ account differs from the balance sheet of the central bank, and, as a consequence, when the monetary authorities’ account is consolidated with the rest of the banking system, the resulting monetary survey would differ from a consolidated statement of the banking system.

(3) Proposed treatment of rubles circulating in FSU Republics

(a) The common currency arrangement. Under the Common Currency Arrangement, any participating FSU republic can obtain rubles from the CBR through its correspondent account; the procedure is straightforward, symmetrical, and similar to that described in the introduction to this section.2/ However, when the republican central bank places ruble notes in circulation, they disappear from the central bank’s balance sheet, because they are the liability of the CBR and not the republican central bank. The most likely entries for the emission of rubles by a republican central bank would be a reduction of foreign assets (cash in vault) matched by an increase in net domestic assets: other items (net) rises as a result of an increase in central bank lending to commercial banks, a reduction of commercial bank deposits with the central bank, or some combination of these transactions. Thus the republican central bank has transformed a foreign asset into a domestic asset; however, currency in circulation within the republic has increased without any entry in the accounts of the central bank.

Accounting for the circulation of ruble notes within an FSU country has important implications for the consolidated accounts of the republic’s monetary system.1/ In the example above, net foreign assets of the monetary system decrease, owing to the increased foreign liabilities of the central bank (correspondent account with the CBR), while net domestic assets increase equivalently if all the ruble notes are used to fund credit expansion. 2/ In this extreme case, deposit money, which is the only component of the money supply that appears in the consolidated statement of the banking system, would remain unchanged. In a less extreme case, some of the newly acquired ruble notes could be used to replace bank deposits, and the decline in net foreign assets would be offset in part by a decrease in deposit money (these two examples are illustrated in Table 1).3/

Table 1.

Consolidated Accounts of Representative FSU Republic

(In billions of rubles)

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In order to construct analytically useful monetary accounts that facilitate monetary programming and economic analysis, the Fund’s MBS methodology would reroute the ruble currency circulation in each republic onto the monetary authorities’ account as a domestic liability, with a counterpart foreign asset. 4/ Therefore, currency would be reflected in the monetary accounts, along with the fact that the ruble notes represent claims on nonresidents. These paired accounts would complement the set of paired accounts already recorded on the balance sheet of the republican central bank in connection with acquiring rubles, namely, a foreign liability (correspondent account with the CBR and, prior to the end of 1991, an interbank account with Gosbank (USSR)) and an offsetting domestic asset as the ruble notes are exchanged for domestic assets or a reduction in domestic liabilities. This proposed treatment of ruble currency in circulation, therefore, consists of four entries or two sets of paired accounts, recorded in the monetary authorities’ account, and is illustrated in Table 2. Table 3 shows the impact of an increase in ruble emission on the monetary authorities’ accounts of both the CBR and the respective republic.

Table 2.

Proposed Treatment of Ruble Notes in the Monetary Authorities’ Account

(In billions of rubles)

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Net Domestic Assets consists of an increase in domestic assets and/or a decrease in domestic liabilities.

Prior to January 1,1992 ruble currency issue was handled by the Gosbank Issue Department, a separate branch of Gosbank (USSR). Correspondent accounts did no. distinguish between inter-republican and intra-republican transactions on the balance sheets of the republic branches of the Gosbank. Therefore, ruble currency issue, along with all other MFO settlement accounts, appeared as unclassified on the balance sheet.

Refers to ruble currency in circulation within Republic NN. Assumes ruble currency issue minus ruble currency in vaults equals 45. Thus, the figure for ruble currency in circulation within Republic NN incorporates an assumption for net migration of 9.

From January 1,1992, the Gosbank Issue Department recorded ruble currency issue in separate bilateral accounts for each Republic of the former USSR. From June 1,1992, ruble currency issue to each Republic has been recorded in the balance sheet of the CBR (which subsumed the Gosbank Issue Department), and includes both amounts issued prior to June 1,1992 and amounts issued after that date, in practice, the date when currency issue begins to appear explicitly as a foreign liability on the balance sheet of each Republic’s Central Bank varies.

Refers to ruble currency in circulation within Republic NN. Assumes ruble currency issue minus ruble currency in vaults equals 62. Thus, the figure for ruble currency in circulation within Republic NN incorporates an assumption for net migration of 11.

Includes ruble currency issue prior to Jan 1, 1992 that has been reclassified from unclassified.

Table 3.

Impact of Ruble Emission on the Monetary Authorities’ Accounts of Russia and Republic NN Receiving Rubles

(In billions of rubles)

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The proposed methodological treatment described above has advantages in addition to the fact that currency in circulation would now appear on the monetary survey. First, the proposed treatment establishes a symmetry between the monetary accounts of all the FSU republics, thereby rendering these accounts more useful in policy analysis for the ruble area as a whole. This symmetry turns on the fact that the net foreign asset position of the CBR and all of the FSU monetary authorities receiving ruble notes remains unchanged after all adjustments are made to take account of currency emission. Before the introduction of the second set of paired accounts on the monetary authorities account, the net foreign asset position of the central bank receiving rubles would have declined pari passu as the bank converted a foreign into a domestic asset.

A second advantage in using a four-entry system in the monetary authorities’ account is that it provides an accounting mechanism for the eventual retrieval of the ruble notes in circulation and their replacement with a national currency. The ruble notes in circulation in the republics have the status of legal tender; if, and when, a republic decides to issue its own (domestic) currency, ruble notes will be accepted by the republican central bank in exchange for the new domestic currency. In terms of the monetary authorities’ account there would be a change in the composition of domestic liabilities associated with currency emission, i.e., exchange of domestic currency for rubles. In addition, the rubles acquired by the monetary authorities represent a foreign asset and would correspond to the foreign assets recorded on the balance sheet of the monetary authorities. These foreign assets, however, would not be exchangeable for other foreign assets but would be charged against the foreign liability originally incurred by the central bank in acquiring rubles (inter-republican liability to CBR). When the ruble notes were removed from circulation and destroyed or repatriated, the foreign liability of the monetary authorities would also be extinguished. 1/

(b) Problems of measurement. The treatment described above for ruble currency issue calls for recording the currency in circulation within each republic on the accounts of the monetary authorities. It should be noted, however, that monetary analysis requires estimates of currency in circulation irrespective of whether the four-entry system is used. Although accurate records exist on ruble emission by republic, there are no statistics relating to currency flows across republican borders. 1/ Moreover, even the official records of pre-1992 ruble emission may be misleading in some cases, since a proportion of the rubles circulating in the republics was issued by the former Gosbank Issue Department and recorded in the interbranch or MFO accounts along with other payments and clearing transactions. Therefore, only estimates exist for ruble currency circulation in each republic.2/

Once a starting point for the stock of rubles circulating in each republic has been agreed--the most likely date for such a benchmark is December 31, 1991--the circulation in each republic can be estimated based on changes in the stock, owing to net emissions under the CCA, and estimates of net currency transactions in the balance of payments. Under the proposed methodology, the initial stock of rubles in circulation in each republic would be ascribed to the monetary authorities’ account with the four entries discussed above. The first set of paired entries would show the stock of rubles in circulation as a domestic liability of the monetary authorities with a corresponding foreign asset, reflecting the fact that the rubles represent a claim on nonresidents. The second set of paired entries would show the rubles emitted as a foreign liability, recognizing the fact that the rubles were obtained from a (currently) nonresident monetary authority--Gosbank Issue Department--and a corresponding domestic asset. Thus the treatment of the stock of rubles circulating in each republic owing to emission before the inception of the CCA would be symmetrical with the treatment of ruble emission under the CCA in the monetary authorities’ account.3/

b. Claims of Republican Financial Institutions on former Union Financial Institutions

(1) The Savings Bank

As noted above, the major function of the Savings Banks in the FSU was to marshal the liquid resources of the household sector and channel them to the Gosbank (USSR). The Gosbank would lend these funds to the various specialized banks to support the overall objectives of the central plan. Deposits placed with Gosbank (USSR) would earn interest that constituted the major source of income for the savings banks in the republics.

In conjunction with the breakdown of the Soviet financial system during 1991, Gosbank (USSR) ceased servicing the deposits of the savings banks, and moreover the status of savings banks’ claims on the Gosbank came into question. Concomitantly, the savings banks in each republic no longer channeled their funds into deposits with Gosbank (USSR). In the case of the Russian Federation the Savings Bank became active in the interbank market and began lending to the enterprise sector, while in many other republics the savings banks began to channel their funds to their respective national banks for onlending to the banking sector.

Another issue that has compounded the problem of savings bank claims on the former Gosbank (USSR) was the indexation of household deposits. In mid-1991, after the April price reforms, the Union government issued a decree that increased household deposits with the respective republican savings banks in order to compensate the household sector for the rise in the cost of living. These officially mandated increases in deposits were initially funded by increases in long-term Union debt to the Savings Bank. However, after the dissolution of the Union the status of these claims became similar to that of other claims by the republican savings banks on the former Gosbank (USSR). Initially, the great bulk of these augmented deposits was frozen until 1994; however, the Russian Federation freed these deposits in mid-1992, and some other FSU republics followed suit.

As a result of these developments, a large proportion of the assets of the savings bank in each republic consists of claims on now defunct financial institutions (Gosbank, USSR) and claims arising from government-mandated increases in deposits. The question arises as to how to classify these claims, in order to consolidate the balance sheet of the savings banks with the rest of the banking system. One approach would be to treat these claims as de facto claims on government, because the republican governments are now responsible for the savings banks and, thus, the ultimate guarantors of their liabilities. 1/ It is also possible to treat these claims as charges against the savings banks’ capital; this treatment would likely lead to a recapitalization of the savings banks by the central bank in each republic. However, until the status of these claims is resolved, they should be separately identified in the monetary accounts as components of “net other items” rather than as part of net claims on government.

(2) The Foreign Trade Bank (Vneshekonombank)

Under the Soviet financial system, the Vneshekonombank (VEB) or Foreign Trade Bank in each republic operated as a branch of the headquarters office in Moscow. Thus foreign currency deposits of enterprises in a republic, although originally booked with the VEB in the republic, would be held in Moscow. With the collapse of the FSU the status of the claims of republican branches of the VEB on headquarters in Moscow also came under doubt, and it does not appear likely that these claims could be satisfied in convertible currency in the near future. Therefore, for purposes of compiling monetary statistics these claims present problems similar to those discussed above for the savings banks. Moreover, these problems have been complicated by the fact that in most FSU republics a successor institution to the former VEB has been established and, in some cases, has taken over part of the balance sheet of the original VEB. Thus some foreign trade banks in FSU republics may include illiquid claims in their accounts.

In these circumstances, it is important for the compilation of monetary statistics that the balance sheets of the existing foreign trade banks clearly separate illiquid foreign currency claims on the former VEB from other foreign currency claims, so that an accurate measure of usable foreign exchange reserves may be formed. In terms of the classification of accounts, these illiquid claims represent frozen assets, much like the claims of the republic’s savings bank on the former Gosbank (USSR), discussed above. As in the case of the savings bank, we recommend that these claims be classified separately under “net other items” rather than as part of net credit to government until the status of these claims is determined. The counterpart to these claims--the foreign currency deposits of enterprises with the former VEB--would constitute restricted or frozen deposits of the foreign trade bank until their liquidity has been established.

3. Proposed methodological framework for money and banking statistics

a. The accounts of the central bank and the monetary authorities

The concept of the monetary authorities was introduced above where it was noted that the central bank does not always control all of the transactions considered to be part of the monetary authorities’ function. In this connection, the foreign assets of the newly formed central banks in FSU countries may not include all official foreign exchange reserves, since these were held by the Vneshekonombank (VEB) under the Soviet system, and some or all of these assets may have been passed on to the successor institutions of the VEB in the respective republics. Moreover, government holdings of gold and foreign exchange reserves are not included in the accounts of the central bank. The consolidation of these balances with those of the central bank to form a monetary authorities’ account in each republic requires the use of offset balances in the accounts of the sectors that actually hold these instruments; in the case of the government this results in a reduction of central bank net claims on government as government deposits are increased by the amount of gold and foreign exchange holdings.

b. The accounts of the commercial banks

(1) Under the Soviet financial system most transactions between banks were recorded in the MFO or Interbranch Clearing system. The delays in the clearing system leading to the development of large floats-- accounting for the largest part of banks’ balance sheets--have been discussed above; these developments have important implications for the compilation of monetary statistics, in particular for the separation of domestic from foreign accounts and the identification of monetary and credit aggregates.

With the dissolution of the Soviet Union and the establishment of fifteen independent countries, the need to identify transactions flows between each FSU republic has become paramount; without such information it would be impossible to determine the domestic and foreign positions of the banking system in any of the newly formed countries. In order to identify inter-republican flows, separate accounts for each new country have been established within the subset of account numbers allocated to the MFO system (830--860), and all FSU countries have established correspondent accounts with the CBR (no. 169 since July 1, 1992). However, it may prove impossible to accurately separate inter- from intra-republican transactions for the period up to the end of 1991, when the interbank clearing system was geared to monitoring the overall balance within the system and not inter-republican flows.1/

In addition, within each FSU country the distinctions between interbank float, on the one hand, and payments and clearing delays between the banking system and the rest of the economy, on the other, have important implications for the compilation of monetary statistics. Under the MFO system substantial delays occurred in finalizing transactions between banks and clearing centers, owing to the cumbersome verification system that led to frequent inaccuracies in the recording and verification of transactions. Such delays constituted a pure interbank float and, although large, under MBS methodology normally would be treated on a net basis in a consolidated statement of the banking system. However, to the extent that the delays represent delays in payments to, or receipts from, the rest of the economy-- essentially arrears--then they have an impact on money and credit aggregates and should be treated on a gross basis in the consolidation of the accounts of the banking system.

(2) Net vs, gross accounts: Certain enterprise accounts relating to long-term investments may be reported on a net, rather than a gross, basis in the books of the banks, i.e., some deposits are netted against loans, and therefore long-term credit to the economy is understated.1/ In order to conduct an effective monetary policy, however, it is necessary to record all accounts on a gross basis, so that a more accurate judgment can be made about the role of the banking system in long-term financial intermediation.

c. The accounts of the Savings Bank

Owing to the large branch networks and their lack of modern communication and computer facilities, the savings banks report only a quarterly balance sheet to their respective republican central banks. Therefore, utilizing the savings banks’ current reporting arrangements would slow significantly the production of monetary statistics. Thus it is proposed that, until the savings banks’ detailed reporting can be made more current, the savings banks report a monthly aggregate balance sheet, sectorized as below, for all transactions since January 1, 1992. 2/ This balance sheet represents the minimum sectorization needed to consolidate the savings bank with the rest of the banking system. The sectorization required is as follows:

Assets:

  • Cash

  • Reserve deposits with the central bank

  • Other deposits with the central bank

  • Deposits/loans to commercial banks

  • Correspondent accounts

  • Government securities (own account)

  • Claims arising from the placement of funds with Gosbank

  • Claims arising from the indexation of household deposits

  • Short-term credit to households

  • Long-term credit to households

  • Basic fund (plant & equipment)

  • Other assets (including claims on Gosbank)

Liabilities:

  • Capital and reserve funds

  • Demand deposits of households

  • Time deposits of households

  • Restricted deposits (due to indexation of deposits), where applicable

  • Certificates

  • Securities

  • Demand deposits of organizations

  • Other deposits

  • Government deposits

  • Correspondent accounts

  • Other liabilities to banks

  • Other liabilities

d. The monetary survey

The IMF’s methodology for compiling monetary statistics consolidates the accounts of all the banks within the monetary systems, plus any adjustments needed to construct a monetary authorities’ account, in order to form a monetary survey. A major purpose of the monetary survey is to identify the counterparts of the money supply, so that policymakers can relate the total amount of money or liquidity in an economy to domestic and foreign assets and, ultimately to the level of economic activity. Therefore, each entity that is included in the monetary survey must have a balanced set of accounts, so that the following identity can be derived for the system as a whole:

Money = Net Foreign Assets (NFA) + Net Domestic Assets(NDA)

In addition to a balanced set of accounts, MBS methodology requires that the accounts of each institution be sectorized so that the major components of money and credit aggregates can be derived; these components include, on the asset side, net credit to government and credit to the household and enterprise sectors and, on the liability side, currency, and demand and time deposits of the various sectors. Therefore, to derive a monetary survey for the FSU republics it is necessary to reclassify the existing accounting system into categories that are broadly consistent with those of MBS. This process and some of the classification issues that arise in deriving a monetary survey from Soviet monetary accounts are discussed below.

e. Proposed uniform classification of accounts

The classification scheme in Table 6 (in the Appendix) presents a methodological framework that can be applied uniformly across all FSU republics. 1/ This approach will facilitate the coordination of monetary policies among the various republics by making transparent the interrelationships among the accounts of the various central banks. This transparency is particularly important for those FSU republics that remain within the ruble area because of the need for close coordination of policies, particularly of those concerning currency issue by the CBR.

The classifications and sub-classifications in Table 6 use account numbers from the Gosbank Accounting System as applied in the Russian Federation. While most of the three-digit account numbers have the same meaning throughout all FSU countries, some variations have developed, and therefore it is not possible to provide a standardized key that holds exactly in each republic.2/ On the assets side the table distinguishes the following aggregates: reserve accounts with the Central Bank and interbank accounts; foreign assets; gross claims on government (subdivided into former Union institutions, republican institutions, and local government, plus extrabudgetary funds operating at each level of government); claims on enterprises and households 3/; and unclassified assets. On the liability side the table distinguishes the following: capital accounts, currency issue (only for monetary authorities); government deposits; demand, time, and long-term deposits; foreign liabilities; interbank balances and central bank lending; and unclassified liabilities. The subaggregates under each of these main headings correspond to sub-aggregates in the Gosbank accounting system.

The aggregates in Table 6 may be consolidated to form a monetary survey (see subsection (f) below). However, some issues remain to be resolved in order to increase the analytical usefulness of these data. The first issue concerns the fact that the underlying accounting system does not usually distinguish between resident and nonresident accounts. Therefore, it is not possible to determine the foreign assets/liabilities of a republic’s banking system according to the Fund’s residency criterion. The accounts that comprise the set 070-079 are the main foreign currency denominated accounts, and as a practical matter it may be assumed that, on the liabilities side, most of these accounts are held by residents. The principal ruble-denominated accounts that concern claims on and liabilities to nonresidents are the inter-republican clearing accounts--usually 830 - 859--and correspondent accounts between republics, some of which have been classified as account no. 169. The present accounting system should be modified as soon as possible to distinguish between all resident and nonresident accounts.

A second issue concerns the relationship between the monetary and fiscal accounts in each republic. Appendix Table 6 provides a subsectorization of the accounts of the general government sector into the following sub-aggregates: government securities (long-term credit); claims on the former Union government; claims on the Republican government; extrabudgetary loans to government; claims on government on account of price subsidies; claims on pension funds; and credit to local government. However, further work is required in each republic to identify those accounts relating to the consolidated central government, i.e., those accounts funded by the central government budget and/or accounts of agencies and extra-budgetary funds operating at the level of the central government. These distinctions are important in the Fund’s statistical methodologies, because the deposits of state and local governments--and agencies operating at these levels--are normally included in the measure of money supply, whereas central government deposits are not; the exception occurs when state and local governments do not have their own revenue sources and merely act as agents of the central government. 1/

f. Compilation of a monetary survey

The classification scheme in Appendix Table 6 provides the basic building blocks for the compilation of a consolidated statement of the banking system and a monetary survey. Using the aggregates shown in Table 6, it is possible to derive a monetary survey as shown in Table 7 in the appendix. This is only one of many possible presentations of the monetary survey; other presentations with more or less detail and presenting some accounts on a different basis (net or gross) are possible.

The monetary survey shown in Table 7 can be applied uniformly across all FSU republics and, thereby, will allow analysts and policymakers to compare developments in monetary aggregates from one republic to the next. Such a presentation is particularly important for the FSU republics because of the need for close coordination of monetary and financial policies among republics, especially those that are members of the CCA and, thereby, continue to obtain rubles from the CBR. Moreover, this framework provides a consistent methodological treatment for the introduction of new currencies in the various republics and thus maintains comparability in the monetary aggregates, as republics seek greater independence in the design and implementation of their monetary policy.

Money and Banking Statistics in Former Soviet Union (FSU) Economies
Author: Mr. K. Wilhelm Nahr, Mr. Robert G DiCalogero, and Mr. Richard T. Stillson