May 27, 2022
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Why can’t the ruble replace the dollar and the euro in Russia’s foreign trade?

The model of the monetary system that has existed in the Russian Federation since the 90s of the twentieth century is not capable of making the Russian economy economically strong

I have heard calls to switch to rubles and the national currencies of partners in settlements of Russia’s foreign trade for many years. But for some reason, the process of “nationalization” of international payments is going very slowly.

Let us turn to the statistics of the Bank of Russia. In 2013, the share of the Russian ruble in export earnings was 10.2%. And at the end of 2022, it increased to only 14.3%. The share of our ruble in transfers for imports in 2013 was 28.0%, and at the end of last year it was 27.9%. Marking time is taking place to the accompaniment of continuous slogans about emancipation from the US dollar, the euro, and other reserve currencies issued by the leading countries of the collective West.

I remember when in 2014 the first volleys of the Western sanctions war against Russia began (in connection with the entry of Crimea into the Russian Federation), the president of VTB Andrey Kostin urged the Central Bank and the government “immediately” to start converting foreign trade settlements into rubles. Four years later, the government developed a special plan to reduce the country’s dependence on the dollar and replace it with other currencies, primarily the Russian ruble. The task was completed very partially. In export earnings, the share of the US dollar was reduced from 79.6% in 2013 to 54.5% in 2021. It happened almost exclusively at the expense of the euro, whose share over this period of time increased from 9.1% to 29.7%. And in transfers for imports for the period 2013-2021. the picture has not changed much: the share of the US dollar was 35.3%, and became 35.8%. The share of the euro was 31.5%, and became 30.4%. The Euro is just as toxic as the US dollar. At the end of February of this year, Brussels, without batting an eyelid, joined the sanctions of Washington and froze that part of the Russian foreign exchange reserves, which consisted of the euro.

In the current situation, Russia can only rely on its own ruble and currencies issued by those countries that are not on the list of unfriendly states (Chinese yuan, Indian rupee, Iranian rial, Belarusian ruble, Turkish lira, etc.). And with the states included in this list, we must trade exclusively for rubles. As a last resort, for the currencies of states friendly to us.

However, unfriendly countries resist and do not want to trade with us for rubles. Most experts rightly say that the reason for this reluctance is political. Europe is a vassal of the United States, which is forcing the Old World to participate in sanctions against Russia. But part of the reason is economic. And sometimes not only unfriendly, but also friendly countries refuse to pay in rubles with Russia. What is the reason? In short, this is the instability of the exchange rate of the Russian ruble.

The stability and predictability of the exchange rate of the national currency is a key condition for the stability of the country’s economy and confidence in this currency on the part of trade and economic partners.

Article 75 of the Constitution of the Russian Federation states: “1. The monetary unit in the Russian Federation is the ruble. Money emission is carried out exclusively by the Central Bank of the Russian Federation. The introduction and issue of other money in the Russian Federation is not allowed. 2. Protection and sustainability of the ruble the main function of the Central Bank of the Russian Federation, which it performs independently of other public authorities“. So, the task of protecting and ensuring the stability of the ruble is entrusted to the Central Bank. We are talking about the stability of the ruble in two aspects: a) ensuring the stability of its purchasing power in the domestic market (that is, preventing inflation or deflation); b) maintaining a stable exchange rate of the ruble against other currencies. Of course, the Central Bank did not cope well with the task of ensuring the internal and external stability of the ruble, but at least it recognized that this was indeed its key task.

Paradoxically, it was in 2014, when the West began to impose sanctions against Russia, that the Central Bank unilaterally reduced the main task entrusted to it by the Constitution of the Russian Federation. The Bank of Russia announced that from now on it will deal exclusively with “inflation targeting” (by the way, this term is from the lexicon of the Washington Consensus). And he withdrew himself from maintaining the exchange rate of the ruble, declaring that he was letting the ruble “float freely” and stopping foreign exchange interventions, which he had previously used to maintain the falling ruble exchange rate. It ended badly: in December 2014, there was an almost twofold collapse of the ruble exchange rate and everything was written off to currency speculators. The blow to the country’s economy was the strongest. And, by the way, in 2014 Moscow was negotiating with Beijing on the subject of a more active transition in mutual settlements to national currencies – the ruble and the yuan. But all these negotiations were crossed out by the collapse of the ruble exchange rate at the end of the year. The Chinese partners have abandoned the wider use of the ruble as an excessively volatile currency.

This kind of collapse of the ruble was not repeated until March of this year, but the volatility of the ruble remained high, which made it a less attractive currency than the US dollar, the euro, and even the Chinese yuan. By the way, the People’s Bank of China (Chinese Central Bank) manages the yuan quite effectively. At least users of the yuan have a rough idea of ​​how the exchange rate of the Chinese currency can change in the short and medium term.

The sanctions war of the collective West provoked a strong depreciation of the Russian ruble: in March it exceeded the level of 120 rubles per dollar. Then began its rapid strengthening. As of May 26, it has already strengthened to the level of 56.3 rubles per US dollar. Many mistakenly believe that this is a sign of the strengthening of the Russian economy. No, this is a sign of her instability. Currency swings can go in the opposite direction.

For some reason, the main disputes in our country are over the question of what kind of ruble Russia needs: a strong one (an overvalued exchange rate) or a weak one (an undervalued one). And most importantly, what the ruble exchange rate needs is stability and predictability.

The model of the monetary system that has existed in the Russian Federation since the 1990s is not capable of making the Russian economy economically strong. Moreover, it turned out to be completely unsuitable for the conditions of the sanctions war against Russia. If we agree that we really need to use the ruble in settlements for foreign trade with other countries, then we need to take urgent measures to stabilize its exchange rate. Previously (until 2014), the Central Bank accumulated foreign exchange reserves for this purpose. And in the event of an excessive weakening of the ruble exchange rate, he carried out foreign exchange interventions, that is, he threw foreign currency out of the reserves on the market. Such a mechanism for stabilizing the exchange rate of the ruble is the worst of all possible. It is also from the Washington Consensus range. Besides, foreign exchange reserves, as we saw three months ago, can be frozen at any moment.

In 1944, at the international monetary and financial conference in Bretton Woods, its participants (44 states) agreed that the cornerstone of the post-war monetary system should be stable (fixed) rates of national monetary units. And in order to maintain the stability of currencies, countries must manage their balance of payments. And for this, first of all, it is necessary to be able to manage cross-border capital flows, introducing, if necessary, temporary or permanent restrictions and prohibitions on capital operations (export and import of capital). Secondly, it is necessary to achieve a balance in the sphere of foreign trade (approximate equality of exports and imports).

So far, the Bank of Russia has not announced a coherent monetary policy. The cross-border movement of capital has been suspended since the beginning of March, but the Bank of Russia claims that this is a temporary measure. Over time, he promises to restore monetary liberalization. And this will be a return to the currency system that was created according to the drawings of the Washington Consensus and which deprived Russia of economic independence.

So, Russia needs a stable ruble. Stable in two respects. It is likely that for this we need a ruble in two forms.

In the first incarnation – the internal, national ruble, which serves all economic relations between individuals and legal entities within Russia. There should be neither inflation nor deflation in the domestic market. To do this, it is necessary to ensure a balance between the commodity and money supply. Without planning, such a balance cannot be achieved.

In the second incarnation – the external, currency ruble, which serves economic relations between Russia and other states. Here, the currency ruble should be stable against other currencies, there should be no devaluation (depreciation) or revaluation of the ruble (appreciation). To achieve stability of the ruble in the external contour, it is necessary to manage the country’s balance of payments.

The contour of circulation of the currency ruble is connected with the circuit of circulation of the domestic ruble in accordance with strict regulations. These two circuits are not freely communicating vessels. Such a division of the ruble into two hypostases and two circuits will greatly facilitate the task of maintaining a stable ruble exchange rate against other currencies. The currency ruble is exchanged for the domestic ruble only for companies that produce export goods or make purchases for imports. The price of the currency ruble at the start can be equal to the price of the domestic ruble. But over time, their exchange can occur in a proportion other than 1: 1. In any case, in the domestic market, participants (individuals and legal entities) must deal with a stable ruble and, consequently, with stable prices. The currency ruble will have to adjust to the domestic ruble.

The proposed scheme provides for the use of the experience gained in Soviet times in the interaction of the USSR with the rest of the world. Such interaction was carried out on the basis of the state currency monopoly and the state monopoly of foreign trade.

Then, however, there was no division of the ruble into external and internal. In the internal monetary circuit, the Soviet ruble circulated both in cash and non-cash form. And foreign currencies were used in the outer circuit, there was no special currency ruble. The Bank for Foreign Trade (Vneshtorgbank – VTB) was then responsible for the external currency contour. He masterfully worked with foreign currencies. Then there were also real threats of freezing key foreign currencies, but the Soviet state did not accumulate foreign currency. Foreign currency was an instant instrument: it came from the exporters of Soviet goods to the VTB account and immediately went to the account of the foreign supplier of the goods we imported. Sometimes transfers of foreign currency took place without visiting VTB – from one foreign account to another.

For the proposed mechanism to work like a clock, supporting the inflow and outflow of foreign currency in the external circuit, it is necessary to strictly regulate the inflow and outflow of capital and ensure the balance of foreign trade. This can be achieved through the development and approval of plans for merchandise imports, which should be linked to plans for the development of the domestic economy. And already under the plans of commodity imports, export plans should be developed. In this way, we will avoid the distortions in foreign trade that have existed for thirty years of the existence of the Russian Federation, when exports chronically exceeded imports (almost twice in some years).

I believe that in addition to the currency ruble, the currencies of other states, even the US dollar, the euro and other currencies, which we today call toxic, can be used in the external circuit. The main thing is that they do not accumulate. They can and should be instantaneous instruments that ensure the fulfillment of plans for merchandise exports and imports.

I have only outlined the contours of the reform, which should lead to the creation of a monetary system necessary for building a strong and sovereign Russian economy.

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