The Imf and the Ruble Area, 1991-19+L211693

Contributor Notes

Author’s E-Mail Address:,

This paper summarizes the IMF advice on the ruble area as it was presented to the national authorities in Russia, the Baltic countries, and other states of the former Soviet Union in 1991-93. In the course of doing so, the paper corrects some misperceptions that have arisen about the IMF's role. The evidence presented in the paper suggests that (i) the balance of arguments on the ruble area (and national currencies) changed over time, and hence so did the IMF's advice, and (ii) from the beginning, the IMF staff concentrated on pointing out the pros and cons of alternative monetary arrangements, without strongly advocating a particular one, emphasizing that it was the authorities' decision to stay in or leave the ruble area. Fund advice on how to introduce national currencies was made readily available to the various national authorities as early as January 1992.


This paper summarizes the IMF advice on the ruble area as it was presented to the national authorities in Russia, the Baltic countries, and other states of the former Soviet Union in 1991-93. In the course of doing so, the paper corrects some misperceptions that have arisen about the IMF's role. The evidence presented in the paper suggests that (i) the balance of arguments on the ruble area (and national currencies) changed over time, and hence so did the IMF's advice, and (ii) from the beginning, the IMF staff concentrated on pointing out the pros and cons of alternative monetary arrangements, without strongly advocating a particular one, emphasizing that it was the authorities' decision to stay in or leave the ruble area. Fund advice on how to introduce national currencies was made readily available to the various national authorities as early as January 1992.

I. Introduction

1. The break-up of the Soviet Union at the end of 1991 into fifteen separate countries, some of which had already declared their independence, was not followed immediately by the introduction of separate national currencies. Some countries moved quickly to introduce their own currencies; the Baltic countries were in the lead, with the ruble being withdrawn around the middle of 1992.2 Most of the others did not withdraw the ruble until 1993, many of them late in the year. But by the end of November 1993, only Tajikistan retained the ruble; it introduced its own currency in May 1995 (Figure 1.).

Figure 1
Figure 1

Timeline of Fund Relations with BRO Countries, 1992-96

Citation: IMF Working Papers 2001, 101; 10.5089/9781451852516.001.A001

Sources: Table 1 and International Monetary Fund.

2. During the two-year period that the ruble area was losing members and operating with decreasing efficiency, there was much discussion both in the member countries and outside about the best course of action for individual countries. The IMF became involved in the discussions from its first contacts with the countries in late 1991 and early 1992. The purpose of this paper is to set out the record of the IMF’s policy advice to the fifteen countries on the ruble area. In the course of doing so, the paper corrects some misconceptions that have arisen about the IMF’s role.

3. Section II provides a short history of the dissolution of the ruble area. Section III sets out the IMF’s policy advice. Finally, Section IV summarizes the IMF’s role, and takes a brief excursion to consider what might have happened if the IMF had pushed in the middle of 1992 for an early break-up of the ruble area.

II. The Dissolution of the Ruble Area

4. After the failed coup of August 1991, President Gorbachev persisted in his efforts to keep the Soviet Union together as an economic and monetary union, albeit with an increasing decentralization of powers. In the economic area, he attempted to put in place interrepublican agreements on an Economic Community Treaty and supplementary treaties on, among other things, a banking union, fiscal and budgetary coordination, and external debt servicing. However, in the last three months of 1991, the union government rapidly lost much of its influence while progress in settling interrepublican relations was very slow. There was considerable mistrust among republics, and the main economic areas of disagreement involved the division of power (e.g., voting rights in the banking union) and of the union’s assets and liabilities. The discussions on these issues were overtaken by the creation of the CIS on December 8, 1991, and the formal dissolution of the Soviet Union on December 26, 1991.

5. The creation of fifteen new sovereign states on the territory of the former USSR was not initially accompanied by any formal changes in monetary arrangements. The Central Bank of Russia (CBR), which in late November 1991 was authorized by the Russian

parliament to take over the State Bank of the USSR (Gosbank) as of January 1, 1992, continued to ship USSR ruble notes and coins to the central banks of the other fourteen countries which had formerly been the main branches of Gosbank in the union republics.3 The central banks continued the practices of the final year or two of the Soviet Union when the Gosbank branches, notably the embryo Central Bank of Russia, financed different rates of credit expansion through running up debits to the Gosbank interbranch payments system. The CBR attempted to limit the credit expansion in the other fourteen countries, and the growing payments imbalances between them and Russia, by introducing a system of central bank correspondent accounts in early January 1992.4 However, the system did not initially have the desired effect because transactions with other members of the ruble area were being automatically credited (debited) to (with) the Russian banking system, and the CBR management was only being informed ex post about Russia’s net claims on other states. The other countries also employed other techniques that allowed them to have different money and credit growth from Russia’s, including setting their own reserve requirements and refinance rates and, in some cases, issuing parallel currencies (coupons).

6. Views about the desirability of retaining the ruble area or introducing national currencies differed between and within the fifteen new countries. The Baltic countries (Estonia, Latvia, Lithuania) and Ukraine sought complete control over their own monetary policy and announced before or just after the break-up of the Soviet Union that they would leave the ruble area as soon as possible. In Russia itself, some people, including many reformers in the government and their foreign advisors, favored the early introduction of a Russian ruble. 5 Other countries would then be forced to introduce their own currencies and could no longer undermine monetary stability in Russia. However, this path was not taken because of (i) concerns about the response of other countries, with implications for the fate of millions of Russians living in other states once separate currencies were introduced; and (ii) pressures from political and business leaders in Russia itself who felt that the preservation of a unified ruble zone would help Russian enterprises and maintain at least one element of the former empire.

7. Other countries temporized about whether to remain in the ruble area or to introduce their own national currencies. On the one hand, they hesitated to leave the ruble area because of fears of political retribution by Russia, worries about being locked out of the interstate payment mechanisms, and the expectation that, by remaining in the ruble area, they could obtain greater financing from Russia (subsidies for energy imports and credits to finance trade) and run expansionary credit policies whose consequences in terms of inflation would be borne by the entire ruble area and not by them alone (the “free rider” problem). On the other hand, they were interested in exploring the possibility of introducing their own national currencies, not only for nationalistic reasons, but also because of: (i) concerns about Russia’s ability to achieve price stability in the face of multiple pressures on the budget for social safety nets and subsidies to uncompetitive industries; (ii) fears about large inflows of rubles from Ukraine following the expected introduction of its national currency in early 1992; and, most importantly, (iii) severe and recurrent shortages of ruble banknotes supplied by the CBR to the other states, which had made it difficult to increase domestic wages and pensions to compensate for inflation.

8. Attempts were made in the early months of 1992 to bring some order into the chaotic ruble area arrangements. An Interbank Coordinating Council of Heads of Central Banks (ICC) was created and began meeting regularly to discuss the coordination of monetary and credit policies and other matters of mutual interest. At its meeting in Tashkent on May 21-22, 1992, the ICC came very close to agreeing on a set of operational guidelines for monetary coordination based on the setting of mutually agreed credit ceilings for each participant central bank in the ruble area and calling for a fair distribution of credit, cash, and seignorage among participant central banks.6 The guidelines were agreed in principle, indicating that the agreement among central banks would need to be submitted to their respective governments for approval. However, the communiqué that was approved during the meeting was not issued, although according to some reports it was signed by the delegations.

9. In the weeks following the Tashkent meeting, the Russian authorities indicated that they did not favor the multilateral approach to running the ruble area, thereby effectively ruling it out. Instead they offered other countries the choice between issuing their national currencies or staying in the ruble area, but they insisted that it could only be a Russian ruble area with the CBR being the only emission center and monetary policy authority. They invited the other countries to make their choices by October 1,1992, and they said that they were willing to enter into bilateral negotiations with each country. This represented a victory for the time being for those in the Russian government who favored the early introduction of the Russian ruble over those in the government and the CBR, probably including its chairman Mr. Matiukhin, who favored the continuation of the old ruble area.7

10. Meanwhile, some countries were already leaving the ruble area. Estonia was the first to introduce its national currency in late June 1992, followed by Latvia in July. Preparations were also advanced in Lithuania, which introduced its currency in October. Elsewhere outside Russia the authorities continued to hope that cooperative ruble area arrangements could be made to work, despite Russia’s apparent opposition.

11. In the middle of 1992 Russia attempted to impose greater monetary discipline on the other countries. In May and June the shortages of ruble banknotes became more acute, although printing capacity limits as well as Russian policy were responsible. As a result, some more countries, namely Belarus, Moldova, and Azerbaijan, issued coupons. In all three cases, multi-purpose coupons circulated alongside the ruble and were issued in response to acute cash shortages stemming from high inflation, lack of cash substitutes, and repeated problems with cash deliveries from the Central Bank of Russia. In Belarus, for example, the introduction of coupons complemented a number of policy measures that limited cash payments for wages, issued checkbooks to higher income earners, made the use of checks mandatory for large purchases, and reduced requirements on the cash balances of enterprises.

12. With effect from July 1, 1992, the CBR modified its system of central bank correspondent accounts and established that financing to other central banks would be limited by the size of “technical credits” specified in advance by the CBR. In principle, under this new system each central bank knew the maximum amount of debt it could accumulate with the CBR/Russia and therefore should have taken measures to reduce its payments deficit with Russia when it came close to the limit. In practice, the limits were not taken seriously and within two or three months, many members of the ruble area (particularly Ukraine) had already reached their credit line limits and/or were running overdrafts on their credit lines. At that point, the CBR took a further step to stop the use of the payments system for balance of payments financing. For each central bank that had exhausted its credit line the CBR processed each day only an amount of payments for imports equal to the amount of the payment orders for exports to that country. The imposition of limits on CBR interstate lending in July 1992 led to the emergence of de facto separate noncash (deposit) rubles in other ruble area states (i.e., they generally traded at different discounts vis-à-vis Russian deposit rubles depending on the interstate financing needs of the different countries). Although this ended the common currency area, strictly speaking, the CBR continued to emit cash rubles to other members of the ruble area. Significant differences in interest rates and exchange arrangements between ruble area countries continued.

13. Little progress was made by October 1, 1992 in the bilateral negotiations between Russia and the countries that wished to remain in the ruble area. The main sticking point was the reluctance of the latter to accept that Russia would make all the key monetary policy decisions. New hopes were raised that an initiative launched by Kazakhstan to set up an Interstate Bank (ISB) would produce new operational arrangements or institutions for the conduct of monetary policy in the ruble area. But the ISB that was announced at the Bishkek meeting of CIS Heads of State on October 9,1992 was limited to being a clearing house for managing interstate payments and settlements. In reality it never even reached the stage where it could do this.

14. The Russian attempt to make other countries choose between national currencies and a Russian ruble area did not lead to any formal bilateral agreements about the latter, even after October 1. National currencies were introduced by Lithuania in October 1992, Ukraine in November 1992, and the Kyrgyz Republic in May 1993. Others continued to be nominally part of the ruble area, although de facto there was no longer parity between non-cash rubles in the different countries, and many countries had introduced parallel currencies. Ruble area countries sought special privileges from Russia, such as increased supplies of ruble banknotes or larger loans for balance of payments financing. Different Russian officials sent conflicting signals about whether Russia wanted them to remain in the ruble area and whether preferential energy prices and balance of payments financing would be tied to ruble area membership. Some government and CBR officials continued to push the position that was dominant in mid-1992 that Russia should not share its currency with other countries, others sought ways to preserve the ruble area.8 At the beginning of 1993, the Russian authorities shifted the responsibility for interstate financing away from the CBR and announced that, following the draw down of existing technical credits, all further financing would be extended in the form of interstate credits (i.e., government-to-government loans) at market interest rates. Also, existing debits in the other central banks’ correspondent accounts with the CBR were transformed into interest-bearing official debts and indexed to the U.S. dollar or the SDR.9

15. The final chapter in the demise of the ruble area started in late July 1993, when the Russian authorities announced the demonetization of pre-1993 rubles in Russia. According to the announcement, pre-1993 ruble banknotes would cease to be legal tender in Russia from September 1993 and the CBR would only deliver new ruble banknotes to those members of the ruble area which subordinated their monetary and fiscal policies to those of Russia by agreeing to the rules of a “new” ruble area. At the time of the July 1993 demonetization, the ruble area consisted of ten countries: Russia, Armenia, Azerbaijan, Belarus, Georgia, Moldova, Kazakhstan, Tajikistan, Turkmenistan, and Uzbekistan. They were still using the ruble as a legal tender, although in several of them (Azerbaijan, Belarus, Georgia, and Moldova) coupons circulated in parallel with the ruble (Table l).10 The Russian announcement was intended to bring about what had not been achieved in 1992, namely a clear separation between national currencies and a Russia-dominated ruble area.

Table 1

Introduction of National Currencies in the Baltics, Russia, and other Former Soviet Union Countries

article image
Sources: Various IMF Economic Reviews.

III. Imf Advice on the Ruble Area

16. In response to the demonetization of pre-1993 rubles in Russia, four countries (Georgia, Azerbaijan, Turkmenistan, and Moldova) announced their departure from the ruble area, while five others (Armenia, Belarus, Kazakhstan, Tajikistan, and Uzbekistan) initially declared their intention to join the new ruble area. On September 7,1993, this latter group of countries entered into a framework agreement with Russia that envisaged a revived ruble area after a transition period during which countries other than Russia would continue to use either old rubles or existing currencies,11 or would introduce new, temporary currencies so as to attempt to achieve monetary control pending unification. However, when these countries realized the possibility of destabilizing cross-border flows of old rubles from other states and Russia’s unwillingness to speed up monetary unification and provide them with new rubles, all, except for Tajikistan, introduced national currencies by November 1993. Tajikistan, which signed a protocol to receive delivery of new Russian rubles only in November 1993, was hit by severe inflation in late 1993 as a result of large inflows of old rubles as they were withdrawn from circulation in other countries.12 It introduced its own currency only in May 1995 (Figure l and Table 1.).

17. The IMF began its association with the former Soviet Union in 1990 when it prepared the first comprehensive international study of the Soviet economy in cooperation with the World Bank, OECD, and EBRD.13 Subsequently, informal contacts were maintained with the Soviet government and, in October 1991, the Managing Director visited Moscow and, with President Gorbachev, signed an agreement establishing a special association between the Soviet Union and the IMF. By mid-April 1992, all the 15 states of the former U.S.S.R. had applied for membership and the staff had prepared a pre-membership economic review paper for each state on the basis of missions to all states in late 1991 and early 1992.14 In tandem, the IMF fielded missions to Russia, the Baltic countries, and other states of the former U.S.S.R. to begin discussing programs of stabilization and reform, that could be supported by Fund resources.15 Between April and September 1992, all states except Tajikistan signed the Articles of Agreement and became members of the IMF, following approval of their corresponding membership resolutions by the IMF Board of Governors and the issuance of all necessary domestic legislation governing relations with the IMF (Figure 1). Russia signed the Articles of Agreement on June 1, 1992. Financial assistance from the IMF was not possible before membership. Russia was the first country to borrow when the IMF approved a first credit tranche arrangement in August 1992.16 The three Baltic countries entered into stand-by arrangements in September and October 1992. The same four countries borrowed again from the IMF in 1993, as also did Belarus, Kazakhstan, the Kyrgyz Republic, and Moldova. Financial assistance to the remaining countries began in 1994-96, except Turkmenistan which has not yet borrowed from the IMF.

18. In the period up to the middle of 1992, the IMF’s policy advice on the ruble area focused on helping countries both choose the currency regime that best suited their needs and implement the regimes they had chosen. There were three main options for the currency regime: a cooperative ruble area arrangement in which all participating central banks would have a say in credit and monetary policy for the ruble area; national currencies; and a Russia-dominated ruble area in which the CBR would be solely responsible for monetary and exchange rate issues.

19. Countries’ positions on the choice of currency regime were mainly determined by sovereignty considerations. These were what caused the Baltic countries and Ukraine to declare early on their intention to introduce national currencies, which they—and only they—did in 1992. These considerations were also the reason for the widespread rejection of the option of a Russia-dominated ruble area.

20. In discussions with the ten countries (other than Russia) that did not declare early on for national currencies, the IMF staff explained the economic advantages and disadvantages of the national currency and the cooperative ruble area options. In favor of national currencies was the difficulty of operating a cooperative ruble area arrangement that could deliver low inflation. In favor of the retention of the ruble area were doubts about the ability of fledgling central banks to operate independent monetary policies, and the benefits for trade of a common currency area. Also relevant to the choice between the two regimes was an assessment of which would be more likely to deliver monetary stability. These arguments are discussed in turn.17

21. A cooperative ruble area arrangement that could deliver low inflation would require arrangements for setting monetary and exchange rate policy parameters (e.g., money growth targets, the exchange rate regime and central bank discount rates) at the level of the ruble area as a whole, and rules for the behavior of the monetary authorities in each country that were consistent with the area-wide arrangements and parameters. In the absence of non-monetary sources of budget deficit financing, a fairly high degree of harmonization of fiscal policies would also be required. While such a system could be readily designed on paper, a high degree of cooperation was required to make it operate successfully. The experience of 1991 and the early part of 1992 showed, however, that countries were well aware of the advantages of simultaneously supporting a cooperative arrangement that was intended to produce low inflation and themselves breaking the rules by allowing faster-than-permitted monetary expansion (and larger fiscal or quasi-fiscal deficits).18 This free-rider problem was especially difficult to overcome in 1992 when widespread price liberalization, the collapse of output, the termination of large budgetary transfers from the former U.S.S.R. to some of the former republics, and sharp increases in the prices of imported energy put enormous strains on monetary and fiscal policies.19 Many observers concluded that there was no possibility of creating a successful cooperative ruble area arrangement in these circumstances, and therefore, whatever its potential advantages, there was no realistic alternative to the introduction of national currencies.20 At the time, however, many countries expressed an interest in a cooperative arrangement.

22. To have a successful national currency, central banks should ideally be independent to enable them to stick to monetary objectives in the face of political pressures to pursue other objectives. They had to develop expertise in managing a whole range of activities such as money market and foreign exchange market regulation and management, banking supervision, accounting, research, and monetary policy analysis, although the requirements for a currency board were less demanding. In early 1992, these institutional requirements were very far from being met in most ruble area member countries.

23. As the collapse of trade and payments between the countries of the former U.S.S.R. was a dramatic component of the general decline in economic activity, priority was placed by the authorities of many countries and foreign governments and advisors on finding ways of restoring trade links. The maintenance of a common currency area would have simplified the task of rebuilding inter-regional trade and payments. It would also have helped to discourage the proliferation of barter trade agreements between pairs of countries, which was harmful for trade restructuring, competition, and economic efficiency.21

24. Early in 1992, there appeared to be a good chance that the Russian authorities could stabilize the monetary situation within Russia. The government appeared ready to take the necessary measures and the Memorandum of Economic Policies (MEP) agreed with IMF staff in late February committed Russia to a sharp tightening of macroeconomic policies to (i) prevent the transformation of the price liberalization burst of January 2 into a price-wage spiral and (ii) reduce inflation to 1 percent a month by the fourth quarter of 1992. Although the MEP did not include a fully-quantified financial framework because of uncertainties about the monetary data and the effects of systemic changes, and the commitment of the CBR was uncertain, the authorities’ policy commitments were quite bold.22

25. At that time there seemed to be little or no commitment to aim for monetary stability in the other countries, with the exception of the Baltic countries which were working toward the early introduction of national currencies. Ukraine, in particular, pursued destabilizing policies: in early 1992, there was no coherent program in sight, there was no wage policy, the fiscal stance was very expansionary (the IMF staff estimated that, in the absence of corrective measures, the fiscal deficit for 1992 could go higher than 15 percent of GDP), and credit to state enterprises and the population was growing faster than elsewhere in the ruble area (Figure 2). The resulting inflationary pressures were exported to other members of the ruble area, including Russia. The problem was compounded by the badly flawed system of consumption vouchers (coupons) introduced in January 1992, which resulted in a dumping of rubles in neighboring states.23

Figure 2.
Figure 2.

Ruble Area Countries: Selected Economic Indicators, 1992-93 1/

(Percent change from previous quarter unless otherwise indicated)

Citation: IMF Working Papers 2001, 101; 10.5089/9781451852516.001.A001

Sources: IMF staff estimates.1/Excluding the Baltic countries.2/ Excluding foreign currency deposites.3/ In percent of total change of Ruble Broad Money during period.

26. In view of the size of Russia and its commitment to seek macroeconomic stability, and the absence of similar commitments elsewhere, it seemed in the first half of 1992 that a cooperative ruble area arrangement in which Russia would de facto provide the nominal anchor would be more likely to produce macroeconomic stability in most countries in the region than a system of national currencies.24

27. The IMF staff discussed these economic arguments with the authorities in all countries and encouraged them to decide whether to pursue national currencies or a cooperative ruble area arrangement. In the case of those countries interested in pursuing national currencies, the staff provided extensive technical advice on the orderly steps for the introduction of a national currency. This work began in 1991 with the U.S.S.R. authorities: at the request of Mr. Yavlinsky, Deputy Chairman of the Committee for the Management of the National Economy of the U.S.S.R., a mission to the Soviet Union in late October 1991 left with the authorities a paper on the pros and cons of introducing national currencies (see Attachment II for a one page executive summary of the paper.) It continued at the beginning of 1992 with the newly independent countries. A conference in Brussels on Codes of Conduct for Interstate Economic Relations (Brussels, February 15–17) was probably the earliest high-level multicountry forum in which Fund staff presented the basic principles regarding the introduction of national currencies (Attachment III and Hernández-Catá (1992))25. The IMF’s technical advice, backed up by the promise of financial assistance, was intensive in the build-up to the introduction of national currencies in the Baltic States in 1992 and the Kyrgyz Republic in May 1993.26 Further detail on Estonia is provided in Box 1. In addition, the staff discussed policies for departing from the ruble area with the Russian authorities, who committed themselves in the MEP of February 1992 to working out with departing countries ways of ensuring the orderly withdrawal of rubles.27

28. For countries wishing to remain in the ruble area, the IMF staff prepared draft guidelines for the conduct of monetary policy (Attachment I) and presented them at the Tashkent meeting of central banks in May 1992. Following discussions with the staff, the Russian authorities had earlier pledged in the MEP to agree with other countries wishing to remain within the ruble area on transparent rules for coordinating monetary and exchange rate policy. In the absence of an agreement about a cooperative ruble area arrangement, whether along the lines of the draft guidelines presented at Tashkent or some other arrangement, the staff encouraged countries to align their interest and exchange rate policies with those of Russia and implement credit policies consistent with the inflation targets in the Russian MEP. The staff took a similar position with countries that were still preparing to introduce their own currencies. For example, the staff urged the Ukrainian authorities in July 1992 to design and implement a macroeconomic stabilization program without delay, stop

Estonia: Currency Reform

On June 20, 1992, Estonia introduced its new currency, the kroon, and replaced the ruble as legal tender in its territory. The kroon was backed by gold and foreign exchange and operated according to the principles of a currency board. The conversion of existing rubles into kroon proceeded smoothly and the Bank of Estonia took a number of administrative and policy measures consistent with the currency board. In addition, the government introduced a strong package of fiscal adjustment measures just prior to the currency reform.

The IMF staff began serious discussions with the Estonian authorities on currency reform in January 1992 and initiated negotiations on a possible stand-by arrangement (SBA) in early April. From the beginning, the staff explained the main elements and prerequisites for a successful currency reform. It also suggested that the reform would gain credibility from a concurrent conclusion of discussions on a SBA, but the authorities decided to introduce the kroon before the SBA negotiations were completed. The IMF staff worked closely with the Bank of Estonia on a general policy framework, as well as on all aspects of the currency reform right up to the date the kroon was introduced. Although the negotiations had not yet been concluded, the Managing Director, judging that the elements for a successful reform which could be supported by a SBA were in place, took the rare step of issuing a press release jointly with the Estonian government in support of the kroon on the eve of the reform. The governor of the Bank of Estonia at that time has acknowledged the positive role of the IMF in the Estonian currency reform (Bank of Estonia (1992) and Kallas (1993)).

exporting inflation to the rest of the ruble area, and coordinate monetary policy with other countries while it remained in the ruble area.

29. While encouraging countries to make the choice between national currencies and a cooperative ruble area arrangement, and explaining the arguments on both sides, the IMF was formally neutral between the two options. It recognized that the choice had a large political as well as an economic element. In the politically highly-charged world of relations between the new post-Soviet states, there was a tendency, at least in the early years, to try to classify third parties as either for or against Russia. The IMF sought to persuade the countries in the region that it was working in the interests of all countries, and did not take sides. Had it openly favored a cooperative ruble area arrangement, it would have been seen by the Russians, especially after the Tashkent meeting in May 1992, as siding with the other CIS countries. Had it openly favored national currencies, a fortiori if it had advocated a Russia-denominated ruble area, many other CIS countries would have concluded it was acting on Russia’s behalf.28 By remaining formally neutral while setting out the economic arguments on both sides, the IMF hoped to retain the confidence of all countries in the impartiality of its advice. While doubts were expressed from time to time by both Russia and other countries, by and large they all accepted that the IMF was not taking sides.

30. As regards the purely economic arguments summarized above, the official IMF line in the first half of 1992 was that either option could be made to work, in the sense of delivering monetary stability and a satisfactory payments system, provided that the rules of the game were observed.29 Critics have argued that the IMF failed to recognize that the free rider problem meant that the cooperative ruble area arrangement was not a viable option.30 The IMF certainly realized that this option’s chances of success were not great after the Russian position hardened following Tashkent. But in the summer of 1992 it felt that it could not rule it out so long as a number of CIS countries believed that they could persuade Russia to adopt it, and major member countries attached importance to preserving the ruble area. Of course, subsequent events showed that the barriers to establishing the cooperative ruble area could not be surmounted.

31. In contrast to the neutral position that the IMF held with respect to the two options, there has been a widespread view that the IMF opposed national currencies and sought to maintain the ruble area.31 The source of this view is not clear. It may well have been born out of the frustration that the Russian authorities and their foreign advisors felt because the IMF did not actively push other countries out of the ruble area, and then limited the scale of its lending to Russia because the authorities did not have full control over monetary policy.32 It may also have reflected the fact that the staff’s proposals at the Tashkent meeting became well known, whereas its assistance to countries introducing national currencies remained fairly private.33 Whatever the original source, it seems likely that the view quickly became conventional wisdom and, in the absence of corrections, was repeated by others who had no independent knowledge of the facts.

32. As 1992 wore on, the balance of the economic arguments for and against national currencies and a cooperative ruble area arrangement shifted. The case for separate currencies became stronger because: macroeconomic stabilization in Russia proved harder to achieve than initially expected; Russia rejected the cooperative approach to running the ruble area; and progress was being made in several countries in strengthening the institutional capacity for sound monetary policy making. Although the IMF retained a public posture of neutrality, by the time of the Annual Meetings of the IMF and World Bank in September 1992, it was privately advising delegates from countries still in the ruble area that the balance of the economic arguments now favored national currencies. This argument fell on increasingly receptive ears.34 It was pressed most urgently in the case of Ukraine, which continued to add to ruble instability. An additional reason in this case was the staff’s view that the sooner Ukraine was responsible for its own currency, the earlier it would be faced with the need to rein in its inflationary policies. Ukraine did eventually withdraw from the ruble area on November 12,1992.

33. With nearly all ruble area countries becoming IMF members by October 1992 and most of them seeking financial support, a new element came into play. The IMF decided that it could not lend to a country unless either it had its own currency or monetary policy in the ruble area was governed by clear and stable institutional arrangements.35 This position was set out in a letter sent in mid-November to the central bank governors and governments of countries still using the ruble (Attachment IV). The letters urged them to come to an early decision on whether to: (i) remain in the ruble area with a common monetary policy; or (ii) introduce separate currencies. They noted that previous attempts to reach agreement on rules to coordinate monetary and credit policies among central banks had not succeeded; and that a monetary system such as the one in place—based on limits on the central banks’ (bilateral) correspondent accounts without a common and disciplined credit policy—was causing interruptions to trade and payments and would not permit the control of inflation and the stabilization of the ruble. Without effective monetary control, the staff would not find it possible to agree with a ruble area member country on an economic program and make available the IMF’s financial support. Under the national currency option, in which countries introduced their own currencies, many decisions had to be made to ensure the stability of the new currency and minimize disruptions to the domestic and neighboring economies resulting from the currency reform. Under the cooperative ruble area option, what was essential for the survival of a single currency area was that the responsibility for a common credit policy be squarely in the hands of a single authority (be it an interstate monetary institution or the CBR). Although there was no immediate policy response to these letters, they may have helped to crystallize issues in the minds of policy makers, and perhaps tilted the balance of arguments in some countries towards the national currency option.

34. From November 1992 onwards, the IMF Executive Board, as well as Fund management and staff, consistently stressed to the various national authorities, in the context of Article IV consultations, staff visits to countries, and other contacts with top country officials, that the balance of arguments had shifted in favor of countries proceeding firmly to monetary independence, unless they could make the ruble area work.36 For countries engaged in program negotiations with the IMF, the staff made clear to them that workable monetary arrangements would need to be in place, whether the country stayed in the ruble area or introduced a separate currency, before the IMF Executive Board would be prepared to approve a program with them. These countries included Belarus, Kazakhstan, the Kyrgyz Republic, and Moldova. Of these, only the Kyrgyz Republic had the clear intention of introducing its own currency, which it did in May 1993. The others, together with Armenia, Azerbaijan, Georgia, Tajikistan, Turkmenistan, and Uzbekistan, procrastinated, hoping that developments in the ruble area and bilateral relations with Russia would clarify the choice. The situation was made easier for them by the introduction of the IMF’s new Systemic Transformation Facility (STF) in April, 1993. This enabled the IMF to make loans even though monetary arrangements had not been definitively settled. Credits under the STF were agreed by the Executive Board to Belarus (July 1993), Kazakhstan (July 1993), and Moldova (September 1993) (Figure 1).

35. The IMF was not consulted about the demonetization of pre-1993 rubles in Russia in July 1993. However, the Russian action, although it created uncertainty, had the effect of pushing the other countries into making the choice between monetary regimes that the IMF had been urging for nearly a year. At the Annual Meetings of the IMF and World Bank in September 1993, the IMF gave a note to the five countries that had signed a framework agreement with Russia on a new ruble area. While acknowledging that it was the sovereign right of any state to enter into a monetary union, the note raised serious concerns about whether a new monetary union would be workable and ultimately sustainable. These concerns related to: (i) the poor track record of monetary cooperation among these countries; (ii) whether other ruble area states would realistically be willing to accept limitations by Russia on their sovereignty in the monetary area; (iii) the inadvisability of attempting to achieve monetary union in a highly inflationary environment; and (iv) doubts about the economic sustainability of such a union in the absence of significant financial transfers from Russia, which appeared not to be forthcoming (Attachment V). These arguments reflected a further evolution of the staff’s views towards rejecting a monetary union, informed by the accumulated experience of the difficulty the countries had in cooperating.

36. Moreover, the staff was concerned about the ability of these countries—which were faced with a potential inundation from other FSU states of old rubles that were no longer legal tender in Russia—to exert domestic monetary control pending a revived currency union. It therefore advised these countries to differentiate their currencies in the interim, preferably by introducing a full-fledged national currency but, if necessary, by creating a de facto separate currency through, for example, the stamping of old ruble banknotes. As negotiations with Russia failed to make much progress, four of the five countries which signed the framework agreement with Russia took steps to separate their currencies and did, in effect, introduce national currencies in November 1993. Tajikistan was slow to follow, and therefore experienced the massive inflow of old rubles that the staff had warned against.

IV. Summary and Conclusions

37. This paper has summarized the IMF advice on the ruble area as it was presented to the national authorities in Russia, the Baltic countries, and other states of the former Soviet Union in 1991–93.

38. In early 1992 the authorities in the ruble area countries were confronted with basically three alternative courses of action on what to do with the monetary system inherited from the U.S.S.R.. The options were: (i) to establish a cooperative ruble area arrangement in which all participating central banks would have a say in credit and monetary policy for the ruble area; (ii) to introduce national currencies in countries wishing to pursue an independent monetary policy, especially if they wanted a more ambitious disinflationary policy than that in the ruble area; and (iii) to establish a Russia-dominated ruble area in which the CBR would be solely responsible for monetary and exchange rate issues for the area as a whole.

39. A Russia-denominated ruble area did not seem to be a viable option in the early months of 1992 because of the opposition of most of the other countries. For similar reasons of sovereignty, the Baltic countries made preparations, with assistance from the IMF, to introduce their own currencies as soon as possible. The IMF explained to the other countries the advantages and disadvantages of the cooperative ruble area arrangement and national currencies, and encouraged them to choose between them. It was formally neutral between the two options. This was partly because the IMF was concerned not to appear to take sides between Russia on the one hand and the other countries on the other hand in what the countries saw as essentially a political rather than an economic decision. Moreover, the economic arguments in early 1992 did not point clearly in one direction or the other: while the difficulty of aligning monetary and fiscal policies argued against a cooperative ruble area arrangement, the disadvantages of national currencies—weak, almost non-existent central banks and the risk of disrupting trade and payments still further—were also serious. In addition, there seemed to be a chance that Russia, which prepared a very promising Memorandum of Economic Policies in February 1992, would be able to stabilize its own monetary situation and thereby provide the anchor for the ruble area.

40. As events in 1992 and 1993 unfolded, the balance of the economic arguments shifted towards national currencies. First, Russia indicated in the middle of 1992 that it would not accept a cooperative ruble area arrangement, leaving the other countries with a choice between national currencies and a Russia-denominated ruble area. Second, Russia failed to stabilize its own monetary situation, experiencing very rapid credit expansion in the third quarter of 1992 (Figure 2). Third, the embryo central banks were developing rapidly into institutions that had a good chance of operating an independent monetary policy. Responding to these shifts, the IMF became gradually less neutral and gave increasing emphasis to national currencies than to the continuation of the ruble area. While its recommendations at the time of the September 1992 Annual Meetings of the IMF and the World Bank were delivered orally and privately, by the time of the subsequent Annual Meetings in September 1993, the note that it presented to the countries that were still contemplating a Russia-denominated ruble area argued that such a regime was unlikely to be sustainable.

41. In addition to explaining the choices open to countries, and urging them to make a clear decision one way or the other, the IMF also assisted countries to implement whatever decision they made. Thus it provided technical and financial assistance to the countries that introduced national currencies (Estonia, Latvia, and Lithuania in 1992, and the Kyrgyz Republic in 1993). And it presented a draft scheme for operating a cooperative ruble area arrangement to a meeting of central banks of ruble area countries in Tashkent in May 1992.

42. This paper has been limited to what actually happened. There are many interesting questions that could be asked about what might have happened if something had turned out differently. Would the ruble area have staggered on beyond two years had the IMF (especially after mid-1992) not guided countries toward separate currencies? If so, what would the costs have been in postponed stabilization? On the other hand, should the IMF have pushed for an earlier break-up of the area? Was it naive to believe that the will to cooperate over monetary policy could ever exist? What would have happened if countries which were not ready—institutionally, politically or psychologically—for a national currency had been forced to leave the ruble area by mid-1992?

43. Most of these and other possible counter-factual questions call for papers in their own right. Nevertheless, we allow ourselves the following summary remarks on what would have happened if the IMF had pushed for an earlier break-up of the ruble area. We do this because it is often suggested that the failure to break up the ruble area by the summer of 1992 was a factor contributing to the broader failure of the reform program in Russia initiated by Yegor Gaidar’s government.37 It is said that, had the ruble area been dissolved, it would have been easier to control inflation in Russia, and the IMF could have been in a position to lend much more money than it did, thus assisting the reform process.

44. We have doubts about this argument.38 First, only a part of Russia’s inflation in 1992 was due to the ruble area and excessive monetary expansion in the other countries. The bulk of it was attributable to the expansionary monetary policies of the CBR although Ukraine’s contribution in the second quarter (45 percent of total ruble monetary growth) was high (Figure 2).39 Second, the IMF might not have been able to cause the dissolution of the ruble area, even if it had tried. Ukraine, which was already committed to introducing its own currency, was in too much political disarray—which is what lay behind its expansionary policies—to implement the new currency much before it did in November 1992; also, the IMF’s influence at this stage, especially before Ukraine became a member in early September 1992, was minimal. Many of the other countries, including the larger ones (Belarus, Kazakhstan, and Uzbekistan), clung onto the ruble for as long as they could, for political reasons and in the vain hope that to do so would lead to special financial favors from Russia. This was in the face of advice from the IMF from September 1992 onwards that they would be better off with separate currencies. It should also be noted that the IMF could not apply pressure in the form of conditionality until countries had become members and entered negotiations about an economic policy program that the IMF could support financially. Very few countries were in this position in the summer of 1992. Ukraine, for example, did not agree on a program with the IMF until 1994, despite the persistent efforts of the IMF and other foreign advisors (Figure 1). Third, even assuming that the ruble area had been dissolved by the middle of 1992, and the IMF had been prepared to lend a much larger amount to Russia than the $1 billion it did in fact lend, what would have been the fate of reforms in Russia? We do not try to answer this large question here, but would point out that the forces that were undermining Gaidar and his government’s program were growing in strength throughout 1992.40 While the stabilization of inflation and strong financial support from the international community would have been significant counterweights, it is not obvious that they would have been sufficient to overcome the growing domestic reaction against reforms.

45. Although the focus of this paper is the role of the IMF in the dissolution of the ruble area, it is obvious from the facts and arguments presented here that other factors were much more important in explaining when and how the ruble area broke up. The critical elements were the political and, to a lesser extent, economic judgments of the key actors in all the ruble area countries, judgments that mostly rested on analyses and world views that the IMF had little ability to influence. Nevertheless, it will be important that the full story of the dissolution of the ruble area, when it comes to be written, portrays the IMF’s specific role accurately. We hope that this paper will contribute to this.

The Imf and the Ruble Area, 1991-1993
Author: Mr. John C. Odling-Smee and Mr. Gonzalo C Pastor Campos
  • View in gallery

    Timeline of Fund Relations with BRO Countries, 1992-96

  • View in gallery

    Ruble Area Countries: Selected Economic Indicators, 1992-93 1/

    (Percent change from previous quarter unless otherwise indicated)