Year XXXI, 1989, Number 3, Page 223
THE ROUBLE, THE TRANSFERABLE ROUBLE, THE ECU AND THE INTERNATIONAL MONETARY SYSTEM*
DMITRY SMYSLOV
The Soviet Union’s new foreign economic strategy is becoming a significant factor in international economic relations and will exert a favourable influence on them.
Till the 1970s economic relations between the Soviet Union and capitalist countries, and between East and West were, on the whole, fairly restricted. Subsequently, however, considerable progress was made. As well as growing trade, the Soviet Union and other communist countries began to carry out active operations in the international credit and monetary markets, expanding, for example, the network of their banks abroad.
In spite of these innovations (compensation agreements, project financing), the Soviet Union’s foreign economic relations were basically restricted to traditional forms, such as trade transactions and their crediting, at least until the mid-eighties. Even more significantly the Soviet Union was not a full partner in the world economic system. It was not a member of the international economic and monetary institutions. Together with its communist partners, the Soviet Union adhered to the principle: “two worlds – two markets – two monetary systems”.
The isolation of the Soviet Union and other communist countries from the international economic, monetary and financial system was conditioned by two basic circumstances. Although reflecting the existence of a political division of the world into two blocs, with its acute confrontation between East and West, nevertheless a naïve belief persisted that this would help to protect the Soviet economy against what the Soviet Union called “market chaos”. However, in the absence of efficient interaction with the world market, a growing technological gap developed accompanied by a decline in competitiveness and a deterioration in the quality of commodities produced. Public opinion in the Soviet Union began to show great concern over this state of affairs.
The process of perestroika, initiated by the 27th Party Congress, includes foreign trade. The Congress expressed the conviction that a growing trend towards the interdependence of states within the world community is a vital characteristic of current growth. As a result of this process, “a controversial but interdependent and in many ways integrated world is taking shape”.[1] All this requires a new type of thinking from us all, a certain re-evaluation of approaches by both the East and West vis-à-vis the most important international economic problems.
The new approach which has been adopted by the Soviet leadership towards foreign economic relations is apparent in two main areas. Firstly, there is a keen desire to use new and very radical forms and methods in the organization of economic relations in order to intensify the Soviet Union’s participation in the international division of labour. Hence, different forms of international production, scientific and technological co-operation are being organized.
Secondly, the Soviet Union and other communist countries are taking steps to ensure their gradual integration into the institutional structure of world economic relations. The Soviet Union’s desire to expand international economic co-operation was apparent in the positive position taken vis-à-vis GATT, ultimately designed to ensure the USSR’s full membership in this organization. The question of potential forms of co-operation with the International Monetary Fund or entering this organization is now being actively discussed in the Soviet Union. The need to form an international monetary system, in which all the countries in the world could participate without detriment to their interests is becoming increasingly evident.
The following three problems stand out: the reconstruction of the monetary and financial machinery of the Soviet Union, the evolution of the CMEA’s monetary system and opportunities for interaction with the European monetary system, and, finally, the prospects for improvement in the world’s monetary systems.
Overhauling the machinery of monetary and financial relations.
The reconstruction of the Soviet monetary and financial machinery is designed to achieve co-ordination between monetary and credit relations and goals of domestic economic policy, an increase in the role of these relations within the entire complex of foreign economic relations, the growth of stability and, at the same time, flexibility of monetary and financial machinery. Ultimately, the question comes down to ensuring that the Soviet system is no longer excluded from world monetary relations and establishing a new model guaranteeing its interaction with the world monetary system.
One suggestion is the idea of opening up the Soviet economy to the world market, forcing foreign trade to become the main force in promoting the economic progress of the Soviet Union but this suggestion is ill-founded. Foreign economic relations must be as efficient as possible and must make a maximum contribution towards economic growth. However, domestic resources and stimuli remain the only basis for this growth.
Overhauling the national monetary machinery presupposes, above all, the establishment of an economically based rouble exchange rate and the introduction of its convertibility.
The consensus in favour of establishing a more correct exchange rate for the rouble in combination with the introduction of some form of convertibility is growing stronger. There is a growing belief that such an exchange rate should not be a remote goal, but a concrete means to solve current and specific economic problems. A flexible exchange rate policy is needed which could take all changes in the economic situation into account.
It is quite evident that a new exchange rate for the rouble would reflect a true correlation of prices in the Soviet Union and abroad to a much greater extent. In this connection, attempts are being made to calculate a “real” exchange rate for the rouble by using a comparison of domestic and world prices, on as broad a commodity basis as possible. There is no doubt that such calculations could serve as useful reference points. However, in the current climate, price ratios cannot be accepted as the only deciding factor for what the exchange rate should be. In addition, such calculations will only be suitable if they are based on prices which emerge after the imminent reform of pricing and the creation of an efficient system of wholesale trade. However, we need the influence of the rouble exchange rate on the economy today, because it could, to a certain extent, favour economic reforms and improve economic machinery. Finally, an exchange rate based on purchasing power would evidently require a market test. In what way could such a test be carried out? Here the question of the rouble’s exchange rate brings us to the second most important question — the problem of its convertibility.
The resolutions passed in June 1987 Plenum of the CPSU Central Committee made provisions for a step-by-step development towards the rouble’s convertibility as a basic feature of economic reform, and one that was to be carried out within the framework of the CMEA.[2] Opinions differ as regards the terms and methods to achieve this goal. Some economists favour an immediate introduction of full rouble convertibility, whilst others argue that it could only be fulfilled after the completion of the reconstruction of the entire economic system and a basic improvement in the technology used in industry permitting the Soviet Union to achieve a world level of competitiveness. Clearly, these conditions are essential if full rouble convertibility is to be introduced. Yet intermediate measures in this direction are necessary even now. A step-by-step introduction of convertibility is necessary if a more efficient participation of the Soviet Union in the international division of labour is to be achieved and production and foreign economic relations are to be stimulated and developed.
As for the methods of introducing the convertibility, a certain consensus of ideas is being formed, based on the fact that, in certain aspects, the Western method which means a transition from external to internal convertibility, cannot be used. The Soviet Union is conditioned by both concrete circumstances relating to insufficient currency reserves and considerations of a more general character — a special role for the state and currency regulation arising from the specific nature of the socialist economy. Therefore, the first stage must relate to a limited convertibility for the rouble, primarily for residents.
The “internal” convertibility of the Soviet rouble presupposes the formation of a closed currency market for a particular, gradually expanding circle of enterprises, other organizations and banks. A relatively free trade in foreign currencies will be realized in such a market according to different modalities. In the end, this would lead to a formation of an interbank market. The internal monetary market controlled by the state would encourage greater independence for enterprises, an optimal redistribution and use of currency resources.
The internal monetary market should lead to the emergence of a fluctuating exchange rate for the rouble. This exchange rate alone would serve as an objective criterion by which to introduce a new official exchange rate by the USSR’s state bank. The Gosbank could use different means by which to influence the rouble’s market exchange rates and their gradual rapprochement with official ones. In the presence of a real and flexible exchange rate for the rouble, together with an improvement in the Soviet economy, it would be possible to make a gradual transition in the future from a free circulation of foreign currencies inside the country to a circulation of Soviet roubles in the world markets, to their use in international payments, i.e. the introduction of full scale rouble convertibility.
In scientific discussions and economic literature there are more radical proposals concerning the formation and introduction of a new monetary unit (some authors call it tchervonets in analogy with the 1920s) which in principle would be a free convertible exchange rate from the outset.
While illustrating the issue of the reform of the exchange rate system for the Soviet rouble and the introduction of its convertibility, I would like to emphasize that at present the approach of the Soviet economists towards this problem is subordinated to the country’s domestic economic interests. The international aspect of the problem is given a peripheral position. It follows from what has been stated above that in the foreseeable future no progress should be expected as regards the Soviet rouble’s transformation into an international reserve currency. However, a collective currency unit for the communist countries could under certain conditions aspire to such a role.
The transferable rouble and the ECU: opportunities for interaction.
At present, in both Eastern and Western Europe, the idea of developing the “Common European House” is gaining ground. The signing of the joint Declaration to establish official relations between both European integrated groupings — CMEA and EEC — in June, 1988, after prolonged negotiations will no doubt stimulate this. Multilateral expansion of economic co-operation between the CMEA and the EEC should become the basis for the “Common European House”. It is quite evident that the relations between the two currency systems should not be excluded from this process.
The basis of the currency system in the communist countries, in contrast to currency systems in the West, is not so much dependent on their belonging to a particular geographical region, but rather their membership of a social system existing in the countries belonging to this system. Hence, the need for these countries to co-operate mutually in a particularly intense way.
The transferable rouble established in 1964 constitutes the main link in the currency and financial system of the CMEA member-states. In the “Complex programme” of socialist economic integration (1971), it is defined as the international collective currency for the CMEA member states and is intended to function as a measure of value and means of payment and accumulation. The circulation of transferable roubles is handled by the International Economic Co-operation Bank (IECB) either through payments for commodities and services or through crediting. The transferable rouble has its own quotation vis-à-vis foreign currencies which differs from the Soviet rouble.
The entire turnover of commodities and services between the CMEA member-states uses transferable roubles. Every country has an account in the IECB in transferable roubles for transactions with other countries, and payments are made through that account. Theoretically, sums may be put into this account by certain countries, but they may be used to make payments to other countries. Thus, the introduction of the transferable rouble was considered, in contrast to the former bilateral clearing system, as a realization of the principle of the multilateral balance of payments. If necessary, the IECB gives credits in transferable roubles to balance these payments.
The “Complex programme” of communist economic integration made provisions for a number of measures to perfect the currency system of the CMEA member-states. In this connection, the following was stated: “The collective currency (transferable rouble), together with the growth of its role, can be potentially used for payments with third countries and occupy the place corresponding to the role and importance of the CMEA member-states in the world economy among other currencies serving international transactions”.[3] In addition, there was a provision for the transferable rouble’s convertibility into the national currencies of the CMEA member-states and also mutual convertibility of the CMEA national currencies.
Experience has demonstrated the usefulness of the transferable rouble system. During the 17 years it has been used in payments of the CMEA member-states, the annual amount of mutual payments increased from 22.9 billion transferable roubles in 1964 to 122.9 billion transferable roubles in 1980, i.e., 5.4 fold.[4]
However, so far the CMEA member-states have not, unfortunately, been able to advance in the direction of achieving the goals set at the beginning of the 1970s to any considerable extent. This engendered a certain dissatisfaction with the transferable rouble and some criticism. It should be pointed out that prices in transferable roubles are an average of world market prices as expressed in the national currencies of Western countries and therefore, such a currency unit cannot be a true measure of value. It is also not a means of multilateral payment because trade between the CMEA member-states is still predominantly on a bilateral basis. In the present conditions, the transferable rouble is virtually just a calculation unit.
At present, the socialist economic integration system is in the process of reconstruction. In particular, a new drive in the process of perfecting the system of monetary, financial and credit relations within the CMEA was imparted by the Moscow meeting of the leaders of the brother parties of the socialist countries, who were the members of the Council, in November 1986, and by the 43rd (extraordinary) session of the CMEA held in Moscow in October, 1987. The organizing member-states embarked on the course towards a creation of the necessary conditions for a further consolidation and development of the collective currency — the transferable rouble — in their payments. In addition, the use of national currencies by a group of countries, as an experiment in payment for commodities and services was also planned. These currencies were to be used to finance common productions and joint ventures. An agreement was achieved by a majority of countries on the introduction of mutual convertibility of national currencies and the transferable rouble with the purpose of raising the efficiency of the currency and financial system.
The intention is now to study the practical problems relating to a gradual introduction of convertibility of the transferable rouble into free convertible currencies. Of course, this is not a task for the present time. A sharp rise in product quality, considerable growth and improvements in the export figure and structure of the CMEA member-states is needed to solve this problem.
Admittedly, the process of rebuilding the CMEA’s monetary and financial system is not proceeding as smoothly as it should. It has now become clear that the transferable rouble cannot fulfil its monetary functions efficiently without profound transformations in the economic systems of the CMEA member-states, the introduction of genuine independence and self-repayment of enterprises, a radical reform in pricing, major changes in the form of mutual economic co-operation and the creation of a single fully-fledged market for the communist countries. Under such conditions, the most significant steps are now being made through bilateral relations. The USSR has concluded agreements with Bulgaria, Czechoslovakia and Mongolia on the mutual use of national currencies with regard to direct common productions and joint ventures. The problem of paying mutual transactions with convertible currencies is being studied.
Active co-operation on a bilateral basis should favour an improvement and consolidation of the centralized monetary and financial system of the CMEA member-states, but under certain circumstances it can also engender centrifugal trends within this system. However, communist economic integration (as well as the Western European integration) needs the existence of a collective currency and a multilateral payments system.
The CMEA and the EEC are natural economic partners. However, the need to organize co-operation between them is not only related to their belonging to the same continent. It is also defined by the fact that both are experiencing a period of profound structural change. The progress in trade and economic relations between the CMEA and the EEC member-states requires an intensification of their mutual monetary and financial relations.
Favourable premises for establishing co-operation between the currency systems of the CMEA and the EEC are being formed thanks to the presence of a certain similarity or closeness in their distinctive features. There is evident symmetry in the institutional structures in both currency groupings: in the CMEA — International Economic Co-operation Bank — and in the EEC — European Monetary Co-operation Fund. Both were given certain features of a central bank. Banking institutions intended for the financing of economic development on a medium-and long-term basis were also formed in both the CMEA and in the EEC. Finally, there are multilateral clearing systems in both groupings.
Collective currency units of both monetary systems — the transferable rouble and the ECU — owe their origin to real assets: in the first instance, commodities and services realized in the market, and in the second instance, centralized gold and dollar reserves. Attention is rightly being paid to the considerable coincidence between the composition of the “currency basket” of ECU and the set of currencies which are used in the mutual trade between the countries belonging to the two European groupings. The value correlations between the transferable rouble and the ECU are liable to undergo considerably fewer fluctuations than, for example, the exchange rate of the ECU in relation to the dollar. It makes both collective currencies comparatively convenient means to be used in mutual settlements.
The problem of possible forms of interaction between the transferable rouble and the ECU has been broadly and thoroughly investigated by the Italian economist, A. Jozzo.[5] I would like to endorse some considerations expressed by him on that count.
There are possibilities of using the ECU in transactions by central and other banks of the CMEA member-states, and those of the ICEB, in particular, owing to the fact that this currency unit was first used in private commercial and financial transactions in the West. Furthermore, it should be stated that for a long time now, the ICEB has had relations and makes transactions in free convertible currencies on deposits, current accounts, and credits with a great number of banks in capitalist countries, including many of the largest financial institutions in Western Europe. The banks of the CMEA member-states and the ICEB could acquire assets, together with the national currencies of Western countries, whilst the ECU, received as payment for exports, supplies the value which would be expressed in this currency unit.
The central banks of the CMEA member-states and the ICEB have the opportunity to ask the ECCF to grant them the status of “third party” ECU holders, as provided for in the agreement on the European Currency system (ECS). By receiving “official ECUs” from the central banks of the CMEA member-states, which have divisions in the EEC member-states, they could join the Banking Association on ECU which includes over 80 banks acting within the EEC and also the Bank for International Settlements which ensures a clearing system for transactions in the ECU. If it were demonstrated that those banks met certain accepted criteria then they could become participants in the clearing system. Such a possible course of events derives from the fact that this system has been recently expanded to the banks of non-EEC member countries.
What, then, are the probable ways in which the transferable rouble will be used in mutual settlements between the EEC member-states and the CMEA member-states and IECB? Evidently, here too, a situation is conceivable whereby Western European banks would have the opportunity to acquire credits in transferable roubles and use them at their discretion for the payment of imports from any CMEA member-state or for other purposes. The countries belonging to the EEC could ultimately become full members of the IECB, the possibility of which is provided for in its charter. The development of such processes could lead to the introduction of certain forms of convertibility of the transferable rouble into the ECU. The second logical step is the definition of the exchange rate between these two currency units.
The conditions for interaction of the transferable rouble and the ECU should evidently become the subject of an official agreement between the two organizations. Such an agreement would, in particular, regulate the method of intervention in the monetary market with a view to maintaining a fixed exchange rate between the transferable rouble and ECU. This does not preclude the possibility for the CMEA and, hence, the EEC member-states of establishing independent contract relations with the central agencies and joint financial institutions of the other integration organization. It is certainly intended that such relations would not conflict with aims and principles collectively agreed upon between the member-states of each organization.
Achieving stable monetary and financial relations between Eastern and Western Europe will undoubtedly stimulate trade and other forms of economic co-operation between them. At the same time, these interrelations would serve as an important link in the world currency system.
Ways of improving the international monetary system.
Evidently, the time has come when the communist countries can no longer allow themselves to be excluded from the process of implementing the international monetary system they profit by. Obviously, together with the greater involvement of communist countries in world economic relations and changes in the world economic system (fluctuation of prices, interests rates, exchange rates) the functioning of this system will exert an increasing influence on such countries, which will affect their economic interests in a very direct way.
And so what monetary system should we strive to adopt? What are the goals in this field, towards which East and West could both work?
It goes without saying that the monetary system based on the dollar primarily meets the interests of the USA. Clearly, this system gives them the opportunity to finance their internal and external expenditure extensively through external sources. However, this type of financing cannot mean anything except a transfer of value from abroad that is an appropriation of a part of the national product of other countries without any equivalent. It is no coincidence that J. Rueff, the eminent Western economist, asserted in his time that such a practice “allows, the United States to live at the account of their suppliers”.[6] In such a context, the foreign dollar accumulations constitute a real debt of the USA in relation to the rest of the world.
The increase of dollar liquidity abroad serves as an approximate appraisal of the size of the “contribution” collected by the USA from other countries. During the period between 1970 and 1986 total debts to government agencies of other countries, obligations of American banks to foreign private depositors and investments of the latter in American Treasury securities increased by an average $40.1 billion dollars annually. This corresponds to 1.7 per cent of the annual level of GDP in the USA (in current prices) for the same period. If, in addition, we take into account an inflow of foreign private short-term capital into the USA, omitted in the statistics (its size is basically defined in the item “statistical discrepancies” in the balance of payments) then the result would be increased to 2.2 per cent of average GDP.[7]
The United States unique position means that it does not experience the difficulties which other countries would meet in a similar situation. They are spared the need to keep their external settlements in balance or, in other words, they have the privilege that they can maintain “le déficit sans pleurs” as J. Rueff neatly put it.[8] Therefore, the international monetary system based on the “dollar standard” ensures significant unilateral advantages for the USA at the expense of other countries. This raises the question of its reform and democratization.
What alternatives are there to the “dollar standard” system? Two practical options can be named. The former is the transition to a system of international settlements, based on the use of a universal collective reserve currency unit, whilst the latter is the consolidation of currency polycentrism, i.e. the formation of separate regional currency groupings which would be formed on the basis of either collective or national currencies.
Progress towards the internationalization of the official reserve system, i.e. a change of the world monetary system from the gold-dollar standard to a collective currency standard is related primarily to the name of R. Triffin,[9] who developed the ideas J.M. Keynes expressed during the Second World War. According to this line of thought the International Monetary Fund (or any other institution which would replace it) should be given the functions of a central bank, regulating the amount and composition of liquid reserves and acting as an international clearing house simultaneously. At the end of the 1960s such an approach led to the establishment of the “Special Drawing Rights” system (SDR).
The trend towards the gradual creation of a universal international currency is prompted by a process of internationalization of production and circulation. The international nature of world economic relations is in conflict with the national character of reserve currencies now serving such relations. This can be explained by the fact that the world community has not yet the maturity, either in a political or in a social and psychological sense, requested to introduce an international payment system which would demand the use of the collective reserve and of the payment means common to all countries.
What has been mentioned above clarifies the fact that the reconstruction of the world monetary system is being predominantly achieved under present conditions through its diversification, that is, through the formation and consolidation of separate currency groupings narrowing the sphere of the dollar circulation to a certain extent. They are based either on the fact that member-states belong to the same geographical region or on the community of the socio-economic system existing in these countries. The formation of such groupings also reflects an unevenness in the economic and political development of the modern world, and the existing contradictions between the interests of separate centres of economic power.
The dollar zone — i.e. the group of countries “pegging” their monetary units to the American currency — remains an important element within the international monetary system. The Japanese yen zone, which is in the process of internationalization, is gradually crystallizing in South-East Asia. The yen’s share of official currency reserves increased from 3.3 per cent in 1978 to 6.9 per cent in 1986.[10] The European monetary system is the most institutionalized within Western currency groupings. A number of Western economists hold the view expressed, in particular, by Professor A. Giovannini, of Columbia University, USA, in a conversation with me that the realization of the “Europe 1992” project, the formation of an entirely integrated internal market within the EEC, would require the unification of the tax systems of the member-states, the formation of a Western European central bank and a common monetary unit. The currency system of the CMEA member-states is one of the currency poles in the contemporary world. It unites a group of socially similar countries.
Under present conditions, it is becoming increasingly necessary to settle the relations between individual currency groupings and to stabilize mutual exchange rates of the currency units which belong to such groupings. The regulation of the machinery necessary for this purpose could evidently become a subject for special international agreements.
Conceivably, the very concept of a collective currency unit is being tested or “run in” at the level of integrational currency formations. In my view, the logic of an internationalization of economics ultimately undermines opportunities for the functioning of national currencies as a global currency. In this context, the appearance of such views is not accidental, such as those stated by R. Cooper, (Harvard University, USA), who considers the creation of the universal monetary unit not only for international settlements, but internal circulation too, to be necessary.[11]
The current monetary system needs a more stable and reliable “anchor” than the dollar which is liable to attacks of inflation inside the country and sharp exchange rate fluctuations in international markets. Furthermore, considerations on a possible “pegging” of the SDR value unit to a certain “commodity basket” are being advanced. The growth of the role of SDRs could evidently be favoured by their use as international payment means, by a guarantee of their “recognition” by participants in the market as a competitive and reliable means of investment of free money reserves — for example, Professor P. Kenen from Princeton University (USA) advanced such a proposal.[12] Thus, it is believed that the need for a transition to the international monetary unit would reveal itself in one way or another.
The reform of the international monetary system is undoubtedly a complicated affair. Rapid progress could be hardly expected in this sphere. Active participation by the communist countries in this process would favour the formation of a monetary system which would adequately reflect the entire multi-coloured palette of the contemporary world. At the same time it would serve as a significant factor in improving the international political climate and in enhancing confidence between countries in the East and West.
* This heading includes interventions which the editorial board believes readers will find interesting, but which do not necessarily reflect the board’s views.
[1] Materialy XXVII syezda Communisticheskoy partii Sovetskogo Soyuza, Moscow, Politizdat, 1986, pp. 20-21.
[2] Materialy Plenuma Centralnogo Comiteta CPSS, June 25-26, 1987, Moscow, Politizdat, 1987, p. 101.
[3] Complexnaya programma dalneyshego uglubleniya y sovershenstvovaniya sotrudnichestva y razvitiya socialisticheskoy economicheskoy intergratsii stranchelov SEV, Moscow, Politizdat, 1971, pp. 50-51.
[5] A. Jozzo, “ECU and Rouble: Towards a New International Monetary Order”, in The Federalist, XXX (1988), pp. 6-17.
[6] J. Rueff, Le péché monétaire de l’Occident, Paris, 1971, p. 264.
[7] Calculated according to Survey of Current Business, Washington, D.C., June, 1986, pp. 42-43; March, 1987, p. 44; Economic Report of the President, Washington, D.C., 1987, p. 244.
[8] J. Rueff, op.cit., p. 23.
[9] Triffin’s views are expounded, in particular, in his following recent publications: R. Triffin, “The Paper - Exchange Standard: 1971-1977” in: P. A. Volcker, R. C. Btyant, L. Gleske et al., International Monetary Co-operation: Essays in Honour of Henry C. Wallich. Essays in International Finance, No. 169, Princeton University, New Jersey, 1987, pp. 70-85; R. Triffin, “W.M.S: The World Monetary System… or Scandal?”, in The Future of the International Monetary System. Round Table Conference, August 28-29, 1986, Castle Szirak, Hungary. Edited by M Szabo-Pelsoczi. Preface by Robert Triffin. The Institute for World Economics of the Hungarian Academy of Sciences, Budapest, 1988, pp. 69-90.
[11] R.N. Cooper, The International Monetary System. Essays in World Economics. The MIT Press, Cambridge, Massachusetts, 1987, pp. 239-278.
[12] P.B. Kenen, “Use of the SDR to Supplement or Substitute for Other Means of Finance”, in International Money and Credit: The Policy Roles. Edited by George M. von Furstenberg, Washington, International Monetary Fund, pp. 327-360.
