The Disintegration of the Ruble Zone: Driving Forces and Proposals for Policy Change

Abstract:     
This paper examines the irreversible process of the ruble zone disintegration. The theoretical fundamentals of a common currency area, with modifications incorporating a mechanism of transition from central planning, are discussed. The key reason for the ruble zone break-up is the discontinuation of indirect transfers that were provided mainly by Russia via underpricing energy exports to other republics. Being cut-off from such transfers and unable to finance the rising trade deficits with Russia, the independent states wish to disconnect their economies from the ruble zone. Among other economic arguments for leaving the ruble zone presented by the former Soviet republics are: a desire to insulate their economies from the ruble zone inflation, and a willingness to collect seigniorage revenues from printing their own crrencies. The paper critically evaluates these and several other arguments. The abrupt break-up of the ruble zone causes interruptions in supplies of essential materials and consumer goods, and the income downfall among the republics. The foundation for a new inter-state payments mechanism is proposed in order to cushion these negative effects. A system of independently traded currencies with flexible exchange rate is viewed as a reasonable, yet distant solution.

Keywords: common currency area, currency board, ruble zone, indirect transfers, seigniorage, former Soviet republics

JEL Classification: E42, P30

Accepted Paper Series