Convertibility of the Ruble Will Test the ‘New’ Soviet Union

The Soviet Union is moving through a politically charged debate toward making its ruble an international currency that will be convertible on the world market, hoping that this will boost trade substantially without greatly disrupting the domestic economy.

As part of a broad trade reform that goes into effect in April, the Soviet Union’s Bank of Foreign Economic Affairs will run foreign currency auctions for Soviet companies that earn money abroad or need it to purchase foreign equipment or materials.

This will replace a 60-year-old system in which Soviet organizations receive foreign currency allocations from the state, and it will probably mean a limited but sharp devaluation from the official exchange rate of $1.65 to the ruble.

How far the ruble will fall is uncertain--it is worth only 20 cents or 25 cents on the black market--and concern is growing over the impact on prices and domestic supplies that a broad devaluation could have.

Vladimir M. Kamentsev, chairman of the state Foreign Economic Affairs Commission and a deputy premier, recently denied Western speculation that the ruble’s initial devaluation would be 50%, saying this was a misinterpretation of a government decision adjusting export prices.

But Kamentsev, addressing a news conference, refused to say what the government thinks is a reasonable exchange rate or what it expects will emerge from the thrice-yearly auctions.

The state will maintain considerable control of the ruble’s value through the Bank of Foreign Economic Affairs in the initial stages. But the Council of Ministers, which is the Soviet Cabinet, announced plans last month to free the rate gradually by eliminating present government-set exchange rates, a complex system of 10,000 “differentiated currency coefficients” now used in foreign trade.

Shortcut to Market

The council also said it plans to allow Soviet prices to respond within limits to supply and demand on the international market in the next two years.

This followed an earlier decision by the Communist Party’s ruling Politburo to make “stage-by-stage convertibility” a key element of the country’s long-term economic strategy--a decision that implied greater trade with the West in the future as well as a basic shift in the party’s economic philosophy.

However, many reform economists are pushing for a series of bold strategic decisions by the Soviet leadership to cut through the knot of issues--ranging from price reform, consumer subsidies and deficit spending to government decentralization and industrial reorganization--that has set limits on economic reforms.

For some of these reformers, ruble convertibility is a shortcut toward introducing market forces into what remains a government-planned, government-managed economy.

“We are looking for a breakthrough and making our ruble convertible could be it,” one Soviet think-tank economist said last month. “As an issue it is not at the center, as price reform is, but it would force decisions on other questions that are more contentious because they are political and ideological.

“And there is no denying that we need to boost our exports badly. Ruble convertibility not only makes trade easier and offers incentives to our enterprises, but it implies a devaluation that puts all our trade on a sounder basis.”

A currency is described as “convertible” when it can be readily exchanged for other currencies by being bought and sold on the international money markets.

But there are degrees of convertibility, and Soviet authorities are examining an initial stage in which the ruble would probably be exchanged in a controlled, limited market between banks, other financial houses, foreign investors and Soviet enterprises.

New Earnings Policy

Although most socialist countries keep track of the trade among themselves in “transferable rubles,” the Soviet ruble has not been freely convertible for decades.

The main reason has undoubtedly been Moscow’s fear of losing all its gold reserves, its small hoard of U.S. dollars, West German marks and other “hard” currencies and probably all of its export earnings as it sought to redeem rubles and maintain the currency’s value.

A second reason, however, was the Soviet leadership’s early determination to protect the new socialist economy from the ups and downs of world capitalism by isolating it. As a result, Soviet foreign trade, $215 billion in 1987, contributed only 2% to the country’s net material product.

Under the new governmental policy, announced last month, Soviet enterprises will be allowed to keep more of their foreign earnings and to use them in new ways in an effort to increase export production.

All Soviet enterprises, including the newly formed cooperatives, will now be allowed to compete on international markets, if they can, although the government will retain a veto right if they begin to undercut one another or if “their activities harm the interests of the state.”

In another measure to increase export earnings and attract foreign investment, the government decided to permit foreigners to hold a majority of shares in joint ventures; previously, they have been limited to 49%, and only about 150 joint ventures have been formed.

Making its currency convertible is now recognized here as one of the basic economic challenges Moscow faces if it is to increase its foreign trade with products that are competitive on the world market and, in this way, to underwrite its industrial modernization and expansion.

Western executives are eager for ruble convertibility to make dealing with the Soviet Union easier and more profitable for them. The ruble’s present inconvertibility limits Western sales to Moscow to a fraction of their potential and means that the basis for any major deal, including joint ventures, must be a product that can be sold or traded abroad to pay the foreign partner.

But underlying the trade problem, economists here point out, is the Soviet Union’s need to manufacture products that are in demand worldwide, products that would in turn create a demand for the ruble and make it worth holding. The country, in fact, is seen as facing central choices on this and related issues that will reshape the whole Soviet economy.

First Steps Critical

In an article entitled “Either Strength--or the Ruble,” Nikolai Shmelev, a leading reform economist, argues in the January issue of the influential political journal Znamya that the Soviet Union has stubbornly tried to maintain the false value that dictator Josef Stalin set for the ruble in 1950 and has consequently weakened its economy.

For too long, the country had dodged the hard reality that the ruble had little value because the Soviet economy was so weak and produced so little of value on the world market aside from raw materials, Shmelev contends. While full, immediate convertibility is impossible, first steps are important in reforming not only trade but the whole economy, he says.

Shmelev makes the creation of wholesale markets in the Soviet Union itself a priority; at present, most goods are allocated by the Soviet central planning agencies, and that means that even with rubles, a buyer cannot obtain goods because the state allocation order is more important than money.

The second condition, he contends, is the much delayed reform of Soviet domestic prices, which are set at present by a state agency on the basis of formulas and calculations that seem unrelated to either production costs, domestic supply and demand or the world market.

With these basic reforms, Shmelev says, the ruble could become convertible for wholesale transactions in the next few years, but it would be fully convertible, in the way that the U.S. dollar or the British pound sterling or the Japanese yen are, only in a decade.

‘Building Socialism’

“Full convertibility of the ruble is impossible without realistic retail prices--that is, without a far-reaching price reform,” Shmelev asserts with unusual caution. “And we ought to tread warily here, for too much is at stake. Economic reform is not yet going strong, and any unwise action can put it seriously at risk.”

Other reform economists, however, see ruble convertibility as a good way to cut through many of the complex strategic questions facing the Soviet leadership, effectively forcing the pace of the restructuring of the country’s economy.

Making the ruble convertible, they assert along with many Western analysts, will test Moscow’s willingness to reduce the role of central planning and to increase that played by market forces, to replace the system of state administration with entrepreneurial freedom for industrial managers and to depart from its previous practice of economic autarky, which had become an integral element of the concept of “building socialism” and protecting it from capitalism.

“We need a real economic mechanism to connect the conditions of our economic life with those of the world market,” Svetlana Kuznetsov, an economist at the International Institute of Economic Problems of the World Socialist System, said recently. Citing the boost this would give to foreign trade, she proposed creation of a new monetary unit, dubbed by some as “the convertible ruble” and by others as “the gold ruble,” as the first step toward making the ruble convertible.

Although she acknowledged the scope of the problems involved, Kuznetsov said: “Let’s not allow ourselves to be hindered by all sorts of fears of ‘cataclysms.’

“The main thing,” she added, “is to understand that the question of the convertibility of the ruble has already been posed by the needs of perestroika ,” or restructuring, President Mikhail S. Gorbachev’s broad program of reforms. “If we keep the ruble as it is, we will not only fail to cope with certain problems, we will exacerbate them.”

As the issue has moved into the forefront of economic problems confronting the government, Soviet leaders have begun to take differing positions that reflect their approaches to overall reforms, according to economists here. And the result has been even greater contention, not only among academic economists but also within the government and party hierarchy.

“We are in a very difficult bind on the ruble--we must make it convertible to boost trade and to achieve fundamental economic reforms, but the cost of doing so could be very, very high,” a senior Soviet economist who is working on the question said recently.

“So, there is a need for caution. Too great a devaluation would mean higher domestic prices, possibly greater domestic shortages resulting in more restrictions on trade rather than fewer and other negative changes.

“And yet caution makes us move more slowly, more tentatively, putting off a lot of questions that really need urgent solution.”

While most orthodox economists and conservative government bureaucrats urge a cautious, step-by-step approach and warn that the benefits are too dubious and the procedure too difficult, liberal reformers are divided, with some, like Shmelev, urging more basic reforms first, while others see the possibility of a breakthrough and want to push all the harder.

Faster Moves Wanted

“The loss of time is saddening, as the currency reform is being postponed by two and a half years,” Boris Fyodorov, an economist at the Institute of World Economics and International Relations, a prestigious Soviet think-tank, wrote in a front-page commentary in the government newspaper Izvestia last month.

Fyodorov, a leading advocate of the Soviet Union’s broader integration into the world market as a stimulus for greater productivity at home, wants faster, bolder moves, fearing that the step-by-step approach will result in half measures that will inevitably fail.

Price reform, perhaps the key to the country’s long-term economic rehabilitation, has already been stalled by the Soviet leadership’s fear that any sharp increases in prices will undermine support for perestroika .

And Leonid Abalkin, director of the Soviet Academy of Sciences’ Institute of Economics, is warning that perestroika as a whole is passing through a particularly dangerous period when major decisions must be made. For Abalkin, the need is not so much speed--he accepts with regret the delay in price reform--but resoluteness.

“We had hopes that (it) would be simple and easy to solve all our problems and to achieve quick results,” he said at a recent briefing for reporters here. “Public opinion expected a miracle, in fact, and people do love miracles. People are now sobering up and paying more attention to the depth of the (economic) problems, whether it be overall growth or price reform or the ruble’s convertibility.”