In June, Russian Prime Minister Dmitry Medvedev called for the introduction of a common currency for the Eurasian Union of former Soviet countries as a hedge against growing volatility in global financial markets. Given the mess the Eurozone is in, why would Russia even contemplate the idea of linking its ruble to currencies like the Belarusian ruble or the Kazakh tenge?
If it comes at all, the "ruro" will not arrive any time soon. Medvedev went out of his way to point out that creating a common currency in Russia's neighbourhood is a long-term project; the Eurasian Economic Union (EEU) that it would serve is not expected to start functioning until 2015 at the earliest. But he also insisted that it's time "to think ahead".
Therefore, the project is being seriously studied by the Centre for Integration Studies, a body attached to the Eurasian Development Bank, which in turn has been tasked with building the infrastructure of the Eurasian Union. That body will be an extension of the Customs Union that came into being on January 1, 2010. The three members - Russia, Belarus and Kazakhstan - are moving rapidly towards closer economic unity.
The final club will almost certainly be enlarged by the membership of several other former-Soviet states, although the likely status of Ukraine remains the biggest unknown. Already one of biggest partners for intra-regional trade, Kyiv has said EU accession remains its top priority, and that would very likely preclude it from membership of the Eurasian club. In the meantime, the academic work on the benefits of a single currency includes the possibility that Ukraine will join.
Avoiding a Greek drama
Dr Eugeniy Vinokurov, director of the Centre for Integration Studies, says that whatever happens the members will move slowly towards unifying their currencies. "The results of modeling a single currency for the three countries (our calculations concern Ukraine as well) suggest that the approach to its creation should be careful and gradual. The structures of the economies involved are cardinally different which give their currencies different trajectories."
Indeed, Russia and Kazakhstan are oil exporters, which makes them beholden to the vagrancies of the international commodity markets. By way of contrast, Ukraine and Belarus are manufacturers and oil importers, which means their currencies go in the opposition direction to the ruble and tenge when oil prices go up. The way out of this dilemma is to try and fully integrate the three (or four) economies. Only by the free flow of capital and labour can these basic differences be ironed out - and full macro- and micro-economic integration has already emerged as a key goal for the EEU.
"If efficient coordination mechanisms at the level of the ministries of finance and economy are not put in place the common economic space will break," says Vinokurov. "We don't need our own Greece. Only when this is done can we think about launching a single settlement currency." However, inequalities between the countries are not so big, Vinokurov claims, pointing out that levels of productivity in Russia, Belarus and Kazakhstan are more-or-less the same, although Ukraine lags.
The first steps have already been taken. In January the three initial candidate countries signed an agreement comparable to the Maastricht Treaty, which sets maximum levels for debt-to-GDP, inflation, and budget deficit. "But there is still no mechanism of coordination on these points like the European Stability Pact," Vinokurov notes. "Now they are working out the mechanism of coordinating fiscal policy between the countries that will include punishments for those that break the rules. The plan is to have this ready by 2015 when the Eurasia Economic Union is supposed to be introduced."
Fiscal union key
The "ruro," or perhaps "altyn" - term used for centuries to mean "gold" or "money" in both Slavic and Turkic languages - is likely to start life as a settlement-currency in mutual trade deals. That, of course, is the whole point of united currencies in the first place, given that they remove foreign exchange risk and reduce banking costs.
Whilst the levels of mutual trade already flowing inside the region suggest that setting up a settlement currency should be relatively easy to achieve and offer significant advantages, Vinokurov expresses doubts about longer-term, full monetary union.
"The biggest question remains if a common currency is beneficial at all," he says. "The preliminary studies suggest that this is not necessarily the case, as the member countries are so different. Really it comes down to how enforceable the rules to maintain economic stability are once the single currency has been introduced. Maastricht has been in place for 20 years and it has brought problems - at least at the fringes of the Eurozone. Clearly the mechanisms that force members to stay within the agreed limits are key; which amounts to fiscal - as well as monetary - unification."
However, whilst the euro may be proving, for now, a partial disaster, the European Union is not. Vinokurov points out that all the members have enjoyed huge benefits from the trading club, noting that the majority of exports sent out by EU members head to peers in the bloc. On the back of that, the level of prosperity in the EU has risen across the board, and members that were less developed when they joined -such as Spain or Ireland - have rapidly closed the gap.
However, ahead of similar results for members of the Eurasian Economic Union lies a lot of rather mundane-sounding tasks. "The EEU will also start life as a mutual trade and services bloc," says Vinokurov. "The member countries will then have to work hard to ensure macroeconomic coordination and to deepen the integration of their financial markets, labour markets, and natural monopolists. That is the main job for the next few years."