Russia and the Zimbabwe Dollar - Tales from the Monetary Afterlife
The story goes that the Zimbabwe dollar stopped being printed in 2008 because the Zimbabwean central bank ran out of US dollars to pay for the paper and ink. The last note printed (although never issued) was the Z$100,000,000,000,000. For day-to-day transactions, Zimbabweans were forced to use US $1 bills, and it is rumoured that ‘small change’ took the form of boiled sweets which were exchanged but hopefully never eaten.
While Zimbabwe suffered a dramatic hyperinflation in 2008, the genesis of its economic problems can be found much earlier. As part of the post-civil war settlement in the early 1980s, the Mugabe government transferred much of the land which had been owned by (white) commercial farmers to its cronies and other beneficiaries as a form of compensation for war veterans. As happened in Venezuela when Chavez nationalised many commercial-farming entities, the net result in Zimbabwe was a fall in agricultural production.
Chat about balance-of-payments (BoP) problems seems a very old-fashioned topic, but in Zimbabwe’s case, it meant that it went from a BoP surplus to a deficit as its commodity exports (notably maize and tobacco) collapsed. With its source of foreign earnings collapsing, the economy began to flounder and the currency weakened, and from a net exporter of grain Zimbabwe moved into the unenviable position of not even being able to feed its own people. Life expectancy fell to one of the lowest levels in the world.
Given the precipitous collapse of the Russian ruble in the past week, it is worth considering Russia’s predicament in the light of Zimbabwe’s experience, particularly from the perspective of the balance-of-payments.
It appears that many of the Russian central bank’s reserves (in dollars, euros etc) have been seized, or at least access to them has been or is about to be restricted by a number of officially-sanctioned means. Russia has these foreign-reserve balances held abroad because it runs a balance-of-payments surplus due its exports of energy, agricultural produce and other commodities (palladium, aluminium and so on). Yet it also seems that any restriction to the SWIFT payment system which may be imposed on certain Russian banks will most likely have a carve-out for energy-related exports upon which Europe depends so heavily.
While there is a lot of chest-thumping in the press about how a ruble is now worth less than $0.01, the monetary and trade situation in Russia is very different from the hyperinflationary one which Zimbabwe experienced. If it continues to export energy and other commodities, Russia will continue to run a BoP surplus (unlike Zim), and it also has large domestically-held gold reserves at the central bank to further bolster the currency and the banking system (again, unlike Zim). While the sanctions and uproar at Russia’s war of aggression is the clear reason for the collapse in the ruble and foreign-listed Russian assets in the last week, the question of what happens next is more nuanced and probably far more important.
As part of a move to reduce its energy dependence on Russia, the German government announced at the weekend plans to accelerate its renewable energy programme and to build new liquid natural gas storage units in the country. This is a long-term plan, and doesn’t really help in the short-term, particularly as energy prices soar.
In the meantime, Europe is still importing gas and oil from Russia and is presumably paying for them in dollars or euros. If it is the case that these dollars and euros are now at risk from seizure due to sanctions, there is a meaningful question whether Russia, as part of potential counter-moves to Western sanctions, will alter the terms of trade. This could involve demanding other forms of payment for its gas: rubles perhaps, or yuan, or even other commodities - potentially even gold.
Exchanging oil for gold (or one commodity for another) is an example of bilateral exchange, sometimes derogatorily referred to as barter. When it is tough to use money (eg during sanctions), exchanges of goods can often be the answer. One of the more peculiar examples of this was Pepsi (ticker PEP.US) getting access to the markets of the USSR in the 1970s by exchanging its soft drinks for tomato paste (Pepsi owned the Pizza Hut brand), as well as for vodka and in one instance a Soviet warship.
One of the great foundation myths of money is that money came into being (or was invented) because barter was inefficient, relying as it did on what economists call a ‘communion of needs’. This means that trade could only happen if I had what you wanted and you had what I wanted. As a neutral medium of exchange, money gets around this problem and allows trade to flourish.
This foundation myth is exactly that - if one looks at David Graeber’s book ‘Debt: The First 5000 Years’ for example, it seems clear that credit (borrowing something with the obligation to repay in the future) preceded money, and not the other way around. This suggests that economies were already becoming complex before money was introduced. Barter as such is probably something which happens only when monetary systems break down, not something which happened before they were instituted.
So for Russia now, which finds itself targeted by sanctions aimed at its foreign monetary reserves due to its own aggressive actions, there is a meaningful chance that it will need to find a new way of trading or of at least securing the benefits of its foreign trade without them being at risk of summary confiscation. If China wants a more international role for the yuan, it is possible that this is one route Russia could take. India has also made some noises towards continuing trade relations with Russia given its energy and agricultural commodity needs. Russia too has offered its own hints; on Monday, the Russian central bank said it had resumed domestic purchases of gold, and has also removed VAT from retail gold purchases to encourage its citizens down that route.
Stepping back from the highly emotive issue of the war in the Ukraine and the terrible plight of the Ukrainian people who are caught up in it, it is necessary to look at the long-term economic and monetary impact of a world which is increasingly being forced to take sides. Many of the processes which seem to underpin globalisation are now at risk.
Not only is war highly inflationary in itself, but some of the measures currently being taken to sanction Russia, particularly those relating to access to global payment systems and central bank reserves, may well cause fractures within the global monetary system, and particularly the role of the US dollar within it. Russia began de-dollarizing following the sanctions imposed on it after its invasion of the Crimea in 2014, and it seems likely that this process will continue.
Given Russia’s unique position as a key marginal producer and exporter of commodities, what it gets in return for those commodities is now the critical question going forward, and it matters as much for the rest of the world as it does for Russia itself. Despite the US being largely energy self-sufficient, any change to the role of the dollar in global trade will have as large an impact on America as it will anywhere else. This is the thing that really needs watching.