This is topic So, why doesn't Russia just use the dollar? in forum General Comments at The Ornery American Forum.


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Posted by WarrsawPact (Member # 1275) on :
 
When the dollar stabilizes, they really should just admit that their economy runs on dollars and make the switch official. Right now the dollar is running the Russian economy in large part, but it's "mattress money."

I understand that for nationalistic reasons they wouldn't want to harm their precious pride, but sharing a currency is a great way to cement ties to open your market to a potential partner -- or, in the case of the euro and dollar, several partners.

The dollar is still a hard currency, despite its, ahem, "troubles" (if you think of a dropping dollar as a "problem"). The ruble is not.
Even with a weaker dollar foreign investment would be much stronger if they were doing business in dollars. The fiscal and business atmosphere of Russia is currently leaving much to be desired, and this would be a step in the right direction.

Russia would know that there would be no run on their currency, Soros-style; and they would know that the US, the big kid on the block, would only pursue policies to better the impact of the dollar. The US is not the only country that has a big debt:
quote:
Securitizing Russia's Debt by Celeste A. Wallander, Council on Foreign Relations

Getting Russia's foreign debt right is crucial to Western security. More than IMF
programs, cooperatively dismantling nuclear weapons, or meeting terrorist threats,
forging the basis for constructive Russian international integration will serve Western
(and Russian) national interests. Instead of stubbornly refusing to renegotiate Russia's
foreign debt, Western countries should use a deal to create the opportunity for Russia's
leadership to get its policies right.

Russian officials say that the country cannot fully pay its foreign debt. They warn of
social and economic disaster if the Russian government is forced to meet its obligations.
Pensions and wages may go unpaid, social services will fail, and the government will
have to give up the strict spending responsibility that has finally put the economy on a
sound footing. They claim that at the very least, Russia needs generous rescheduling of
the $48 billion Paris Club debt it owes to Western governments. They are right.

Officials in Western creditor countries warn that Russia must live up to its international
financial obligations if it hopes to attract international investment, something a Russian
economy in need of $2 trillion in investment over the next decade cannot do without.
They say that with Russian government budget surpluses from last year's high oil prices,
and with a growing economy, Russia can afford to meet its payments due this year. They
are right, too.

Can and Should Russia Pay its Debt Now?

How can they both be right? Because while the Russian economy looks good now, the
next few years do not. Huge government tax and export fee surpluses mean that Russia
can well afford the $3.5 billion it owes in 2001. Russia's economy grew nearly 8% last
year, but will slow to 4% this year. Since energy accounts for one quarter of the Russian
government's receipts, the surpluses of 2000 were due almost entirely to high global
energy prices. Every $1 fall in the price of a barrel of oil means a $1 billion fall in
Russian government receipts, and oil prices have already fallen over $12 per barrel since
late 2000. Russian capital flight was up 30% in 2000, further starving the country of the
resources it needs for robust long-term growth.

Furthermore, the fall in energy and tax receipts will coincide with a huge increase in
repayment obligations. In 2003 Russia will owe over $17 billion to Paris Cub creditors.
The overall government budget for 2001 is about $42 billion: even assuming reasonable
growth over the next two years, debt servicing alone would absorb over one-third of all
government spending in 2003.

Considering Western Interests

Of course, these are Russia's obligations and the international community has the right to
demand Russia meet them. Yet the question is whether forcing Russia to meet those
demands is in our own interest. The Russian government has only just managed to settle
wage arrears and inter-enterprise debt. These achievements are in Western interests: they
contribute to the social stability and economic soundness necessary for Russia's
achievement of market economic conditions. Insisting that the Russian government pay
its debts at all costs in the next few years could undermine the very conditions we have
hoped the Russian economy could achieve on its way to market reform.

This is why Western refusal to renegotiate Russian debt is short-sighted and selfdefeating.
Right now, while the economy can handle it and the government is looking for
a solution--as opposed to the default it faces in two years--Western countries should get
an agreement from Russia that insures short-term payment and medium-term relief.

Why should we care whether Russia's economy can survive its debt obligations? Because
in today's Russia, economics and security are closely linked. The Russian defense
establishment is in the midst of a battle over its allocation of resources. Russia's failed
economy produces policies of security-on-the-cheap through reliance on aging Soviet-era
nuclear weapons. Russia's new military doctrine relies heavily upon the threat of nuclear
use and escalation at all levels to deter potential attack or political coercion, particularly
from NATO. Reports this month that Russia may hold tactical nuclear weapons in the
Kaliningrad region between Poland and Lithuania may be just the first indication of the
kinds of desperation choices a resource-starved country makes. We have security
interests in Russia's evolution to a reformed, professional, and substantially smaller
conventional military force structure. But this choice will be expensive, far more
expensive than relying upon Russia's aging nuclear stockpiles.

Furthermore, a smart debt deal can have positive ripple effects throughout the Russian
system. A deal should be based in part on the debt-for-equity swap now the subject of
negotiation between Russia and Germany (which holds some 40% of the Paris Club
debt). Swapping debt for holdings in Russia's successful industries would have
substantial benefits beyond mere debt relief. It would further the goal of entangling
Russia's national interests with those of the international community, an achievement that
proved so successful in Germany's postwar rehabilitation. Moreover, if the deal required
Russia to implement proper standards of corporate governance, international accounting,
and transparency, it could help achieve what is most needed to launch future foreign
direct investment in the Russian economy. Failing to tackle Russia's bleak investment
environment has been the single biggest shortcoming of the Putin leadership's economic
reforms to date.

Conclusion

In the end, we do not owe Russia debt forgiveness. But we do owe it to ourselves to
encourage the Russian leadership to establish the conditions necessary for a real market
in the globalizing economy. In doing so, Russia is likely to focus its national priorities on
positive relations with the West, which may make security problems easier to manage in
the next few years. A debt solution that goes beyond mere finances to encourage
structural economic reforms and international integration would marry strategic vision
with economic liberalism in a way appropriate to the realities of globalization.

Does this not describe the perfect condition for taking on a Western, hard, currency?

They can't afford a currency like the Euro, yet. They have a trade surplus of $60 billion; why use a currency that will increase the price of your goods everywhere you export them?

Yet, Russia has been cutting their foreign reserves of dollars (which amounted to 90-95% of the reserves in 1999 and only 70% in 2003) in favor of Euros (for obvious reasons). It's okay to use another currency to stabilize your own currency (that's the point of foreign reserves), but for now they should choose a truly stable currency for the reserves and use the dollar as an actual currency once it stabilizes.
Why not? They already sell their raw material exports to the EU in prices fixed at dollars. [Smile]
When the dollar stabilizes, it's time to switch. Just an idea.

[ December 07, 2004, 08:57 PM: Message edited by: WarrsawPact ]
 
Posted by Adam Lassek (Member # 1514) on :
 
What's so hard about American currency? It's backed by nothing more than the credit of the Federal Reserve.
 
Posted by WarrsawPact (Member # 1275) on :
 
"Hard" is a relative term meaning it's relatively stable.
 
Posted by Snowden (Member # 407) on :
 
quote:
I understand that for nationalistic reasons they wouldn't want to harm their precious pride, but sharing a currency is a great way to cement ties to open your market to a potential partner -- or, in the case of the euro and dollar, several partners.
Doesn't this assume that Russia is never going to have a stable legal domestic economy? It's a big country, once they get their mojo going again, they are going to appreciate the flexibility that goes along with having their own currency.
 
Posted by Adam Lassek (Member # 1514) on :
 
I'm just being pedantic and bloody-minded. [Big Grin]
 
Posted by Zyne (Member # 117) on :
 
They could link to the dollar without going onto the dollar... But I'm not sure we (merrykuns) want the noise in our dollar we would get from their link.
 
Posted by WarrsawPact (Member # 1275) on :
 
Snowden - No one in Russia thinks their new stupendous economy is just around the corner. If they wanted to switch back, who's to say they couldn't?

Adam - Fair enough.

Zyne - Tell me more about linking to the dollar. You mean, they set the ruble at the rate of the dollar?
Doesn't that kinda complicate it? When people buy up dollars, they'd be affecting rubles too... but what if people buy up rubles instead? We're not linked back to them.
Or is that what you're talking about?
 
Posted by Zyne (Member # 117) on :
 
WP--Several countries have done the same, or are doing the same, making their domestic currency at a set ratio to the dollar (or another currency)--IIRC China, Cuba, Argentina, others. IMO these countries don't matter too much from the US point of view (except maybe China, but not quite yet). Russia, with its sheer size of being and potential, could if they linked up--The price of a ruble could affect the price of a dollar, since rubles could be traded for dollars at a set price.
 
Posted by Slander Monkey (Member # 1999) on :
 
WarrsawPact,

Two little questions...

1. How do you propose that Russia goes about converting its currency to the dollar? As I see it there are two ways: 1. make a deal with the US to trade ALL of the rubles for newly printed dollars (or electronic dollars -- whatever) -- which seems highly unlikely to happen. Or 2. Slowly phase in dollars -- which are brought into the economy via a trade surplus with the U.S. -- but at best, this means that Russians would have to operate with a dual currency for many years as the value and use of rubles "painlessly" declines, at worst, the there would be a rapid "in country" devaluation of rubles, which would screw those stuck holding them; the Russian economy as a whole would likewise be devalued, at least in the short term, which can be good considering that Russian assets will become cheap with regards to foreign investors, and thus stimulate the economy, but it still ends up screwing a lot of people.

It seems impossible -- except perhaps by totally bamboozling the rest of the world -- to make this work by simply buying other currency. The ruble would immediately fall through the floor, and the Russians would be lucky to get even 10% of the current exchange value for a 100% trade. Though I suppose the people buying rubles would be the ones who were really screwed.

Are there any other ways to go about totally converting a country's currency?

2. Also -- from the article:
"Every $1 fall in the price of a barrel of oil means a $1 billion fall in
Russian government receipts, and oil prices have already fallen over $12 per barrel since
late 2000."

Looks like this article is a tad old -- 2002? Do you know what the current situation in Russia is or what happened with regards to the article's suggestions in the interim? I know I haven't kept up with that news.

[ December 08, 2004, 12:59 AM: Message edited by: Slander Monkey ]
 
Posted by Slander Monkey (Member # 1999) on :
 
quote:
Originally posted by Zyne:
WP--Several countries have done the same, or are doing the same, making their domestic currency at a set ratio to the dollar (or another currency)--IIRC China, Cuba, Argentina, others. IMO these countries don't matter too much from the US point of view (except maybe China, but not quite yet). Russia, with its sheer size of being and potential, could if they linked up--The price of a ruble could affect the price of a dollar, since rubles could be traded for dollars at a set price.

The currency peg, seems to only work where the money supply is tightly controled by the government (or by the World Bank/IMF as the case may be in Argentina), but it's really just an extreme way of using foreign reserves to stabilize your currency.

The exchange rate peg is therefore cheaper (so to speak) than a total currency conversion as Warrsaw is suggesting. I'm just guessing here, but I think that pegging your currency to the dollar (at a sensible rate) would require you to hold only only a fraction of your country's GDP worth of the foreign currency in reserve (because it's only relevant for international trade transactions), while converting the whole of the currency would require you to hold the some multiple of your countries total assets worth of the foreign country's currency (because the foreign currency would be used for all international and domestic transactions). That's a big difference -- but then, I could also be a big idiot and not know what I'm talking about [Smile] .
 
Posted by WarrsawPact (Member # 1275) on :
 
Well, let's link Zyne's idea to Slander Monkey's: link the price of a ruble to the dollar until the conversion is compelte or near-complete. Some countries have phased out old currency in the very recent past, how did *they* do it?

For example, the Euro replacing all those European currencies. And Belarus and Russia to share the same currency in 2005 (the rouble).

As for the article being old, yeah it is. But Russia has actually substantially increased its oil production since the war in Iraq, from what I hear. Is that a pretty good clue of how that industry has been affected?

A constant exchange rate, as Slander monkey suggests, would negate some of the benefits of truer currency linkage. They've already *got* lots of dollars over there, and lots of materials pegged to the dollar.
Russians currently pay for goods in rubles but save in dollars. The rate of this "mattress money" savings is staggering.

Yet the switchover by citizens to euros as the dollar slides is going fairly quickly, and Russia is starting to consider changing its exchange currency to euros. Russia was thrown into bed with the French and Germans during the Iraq War, and there's little doubt they want to play nice with the EU for several reasons.

I dunno, maybe the question should be: why doesn't Russia pick up the euro? if that's their new mattress money.

[ December 08, 2004, 01:43 AM: Message edited by: WarrsawPact ]
 
Posted by Slander Monkey (Member # 1999) on :
 
Warrsaw,

I think the main problem with a total conversion, like you are suggesting, is that for it to *really work*, it has to be enacted via a mutual agreement between two countries. In this case, Russia would have to subject itself to American banking laws, and perhaps even welcome a branch of the Federal Reserve into Moscow -- otherwise they are stuck with a fixed money supply (plus trade surplus funds of course) or will be forced to create a new loanable currency (perhaps the ruble3000) to avoid deflation in a growing domestic economy. The latter case would put them back at square one. Perhaps, such a conversion can only work under a perpetual trade imbalance.

Picking up the Euro, on the other hand, makes much more sense anyway, since it's already built to be a multi-national currency. But this would again probably require the acceptance of the Russians into the EU for it to work out successfully.

What do you think about that?

quote:

As for the article being old, yeah it is. But Russia has actually substantially increased its oil production since the war in Iraq, from what I hear. Is that a pretty good clue of how that industry has been affected?

I didn't know about increased oil production, but obviously oil prices are significantly higher than what they were when the article was written -- both of these facts would seem to be a boon to the Russian economy.
 
Posted by Delirium Tremens (Member # 1997) on :
 
quote:
When the dollar stabilizes, they really should just admit that their economy runs on dollars and make the switch official.
WP, you don't change currencies like you change a pair of trousers.

If you want some arguments, look at e.g. why Britain is not joining the euro, what the criteria are to be allowed to the euro-zone (yes, Russia would currently not be allowed to the euro-zone) and how the European Central Bank is structured and why it is structured as such.


I'll give you some arguments below.

quote:
Even with a weaker dollar foreign investment would be much stronger if they were doing business in dollars.
It is much too simplistic to assume that the only effect of a currency value is 'the lower the value, the easier to export'.

Here are some effects of a changing exchange rates:
- A weaker currency stimulates export
- Contrary to your statement: a weaker currency weakens foreign investments. Just to give an example: suppose the US stock markets raise 8%, but the dollar drops by 10%. As a European, why would I buy US stocks? I'd better put those euros under my mattress.
- A weaker currency increases inflation and by consequence, intrest rates must increase as well.
- A weaker currency makes the population poorer.
- A weaker currency makes it easier for foreign companies to take over national companies and more difficult for national companies to take over foreign companies. (btw: this was the main reason behind the 'strong dollar'-policy that lasted for years).

In short, the central bank has a way to control various aspects (wealth, export capabilities, attracting investments or making them less attractive) of the economy by:
- Printing more or less money
- Buying or selling foreign money
- Raise or lower intrest rates

A country that gives up its national currency (and therefore, its central bank) loses the ability to control its own economy by the ways mentioned above. This is why in case of the euro:
- Each member country of the euro-zone has a seat in the ECB (European Central Bank). Decisions are not made by one country.
- In order to be allowed to the euro-zone, there are criteria to make sure that the economies of the different countries are more or less 'in sync'. BTW: I think there are plans for the Chzech Republic, Hungarya, Poland & Slovenija to join the euro, but necessary reforms to their economy will take at least another 5 years.

All these aspects can of course also be used as a weapon in case of conflicts. Imagine what the American Federal Reserve could do to a dollar-based Russian economy if Russia wants to intervene in let's say Ukraine? Unless of course, Russia will have something to say in the FED - which I doubt the US will allow them to.

Using a currency peg is a common practice to avoid the disadvantages of a total currency switchover. And - more important - it can be abandoned easily if it becomes too costly.
 
Posted by Snowden (Member # 407) on :
 
And since so much of the value of money is tied with perception, doesn't the willingingness to change currency already devalue the currency?

[ December 08, 2004, 04:50 AM: Message edited by: Snowden ]
 
Posted by Delirium Tremens (Member # 1997) on :
 
"And since so much of the value of money is tied with perception, doesn't the willingingness to change currency already devalue the currency?"

It depends. If a currency change is badly prepared, it certainly will: in the Russia-dollar case, you can expect that there will be a huge demand for dollars (dollar up), and that nobody wants to buy rubels anymore (rubel down).

In case of the euro, 1 year before the introduction, all concerned currencies were officially fixed against each other. The different national banks made a commitment to eliminate all fluctuations. This action - though it cost quite some money - was good for perception and reduced speculations.

In case of Poland, Hungary and the like, the currencies are actually growing a bit stronger, because many believe the EU will want to make these nations richer by exchanging their money against a good rate.

Again, the important point is that a currency switchover has to be very well prepared and that different national banks have to plan and cooperate.
 
Posted by WarrsawPact (Member # 1275) on :
 
Im learning a lot!

Delerium - I didn't say that going to a weaker currency would increase foreign investment. I said going from *roubles to dollars* would increase foreign investment. Is the Russian rouble suddenly stronger than the dollar?
Isn't it something like 29-point-something rubles to the dollar?
 
Posted by Delirium Tremens (Member # 1997) on :
 
"I didn't say that going to a weaker currency would increase foreign investment. I said going from *roubles to dollars* would increase foreign investment."

Sorry, I was a bit too careless in my reading. Given my remarks, it would be extremely difficult to predict the effects of a roubel/dollar switchover on foreign investments in Russia.

"Is the Russian rouble suddenly stronger than the dollar? Isn't it something like 29-point-something rubles to the dollar?"

A 'strong' currency is a notion that imho is badly defined. I see it as a currency that keeps its relative value or increases in value compared to other currencies, though others have probably other definitions. It's not because the euro/dollar rate is higher than 1 that the euro is 'stronger' than the dollar: you have to look at the long term evolution. (Btw: I don't know anything about current or historical dollar/roubel exchange rates).
 
Posted by WarrsawPact (Member # 1275) on :
 
I know the exchange rate isn't what makes a currency strong, but I was referencing just how far the ruble has slid against the dollar over time. Sorry, didn't make that apparent.
 
Posted by ATW (Member # 1690) on :
 
Russia could theorhetically "dollarize" their economy. If they did it slowly enough there shouldn't be any disruption. They are an exporter to the US and get paid in dollars.

They could peg their money to the dollar.

They could also peg their money to the value of some tangible asset like gold.
 


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