Russian president Vladimir Putin is running out of friends in Europe and Western Asian, and he plainly wants to keep those who remain close. On Friday, he proposed that Russia, Kazakhstan, and Belarus form a currency union – a situation similar to that in in the Eurozone, in which all three nations would use a common medium of exchange.
Putin on Friday met with Belarussian President Alexander Lukashenko and Kazakh President Nursultan Nazarbayev. After the meeting, he told reporters, "The time has come to start thinking about forming a currency union."
Neither Lukashenko nor Nazarbayev commented on the question of combining with Russia under a single currency, but it seems safe to say that they are likely to be dubious at best.
The benefits of a joint currency would include removing foreign exchange risk on the substantial trade among the three countries, which at the beginning of the year formed the Eurasian Economic Union (other participants include Armenia and, eventually Kyrgyzstan).
The EEU, sort of a junior version of the European Union, removed many restrictions on cross-border trade and allows free cross-border travel for citizens of member states. The elimination of exchange risk is no small matter at a time when the Russian ruble has lost about 40 percent of its value due to international sanctions related to the Russian invasion of Ukraine’s Crimean peninsula and its support of rebels in eastern Ukraine.
To see the potential dangers of such a Union, particularly one in which one partner is dominant, the presidents of Belarus and Kazakhstan need only look to the southwest to see what is currently happening to Greece.
The Greek economy was not in great shape when the Great Recession hit, which crippled the country with debt. It never implemented a rigorous tax collection system and growth initiatives that could have immunized the country against collapse. Today, Greece is still struggling to recover.
Germany, on the other hand, is disciplined on all counts and is the dominant economy in the Eurozone. It long resisted measures that might have eased the pain of its weaker neighbors, including lowering interest rates as the U.S. Federal Reserve bank did with considerable success.
There is no doubt about who would be the dominant partner in such an arrangement. Even given the tough economic times it has been facing, Russia’s $3.6 trillion economy in 2014 was more than six times the size of the combined economies of Kazakhstan’s ($420.6 billion) and Belarus’s ($176.9 billion).
Unclear at the moment is whether Putin is proposing the creation of an entirely new currency, or suggesting that the other EEU countries simply adopt the ruble. The latter move, bringing a group of former Soviet Socialist Republics back under the ruble, would be hugely symbolic. Putin, however, would likely have to cede some of the Russian central bank’s control over monetary policy to get his partners to agree.
Russia has also shown no compunction about bullying its EEU partners. It banned food imports from Belarus for a time last year, inciting a trade war. The reason behind the ban was Russia’s belief that Belarussian exporters were re-selling European foodstuffs that Russia had placed under embargo.
However, before any of Putin’s partners begin worrying about the details of monetary and trade policy, they will likely want to think seriously about the wisdom of deepening their economic connection to Putin. Tying their very currency to a Russian regime that has shown little concern about transforming itself into an international pariah state, subject to debilitating sanctions, could be a fatal mistake.
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