Russia: Pushing the Ruble

4 MINS READNov 17, 2008 | 19:48 GMT
Russia and its former Soviet neighbors are meeting to discuss a proposal to carry out energy transactions in rubles instead of U.S. dollars. The plan theoretically offers an economic benefit to importer states, but they might not go for it given the political strings attached.
National bank chiefs and finance ministers from the Commonwealth of Independent States (CIS) — which includes Russia, Belarus, Moldova, Armenia, Azerbaijan, Kazakhstan, Uzbekistan, Tajikistan and Kyrgyzstan — are meeting Nov. 17 to discuss the possibility of using the Russian ruble for payment of energy deliveries from Russia. This initiative has been on the table for some time, but now Moscow is pushing the plan in order to prop up its own currency and solidify its control over other CIS countries. Currently, Russia accepts energy payments in U.S. dollars from its export customers and then converts the money to rubles. However, Russia tacks on a hefty fee for the currency conversion, making energy imports from Russia just that much more expensive. The offer on the table is to allow importers of Russian energy (at least within the CIS) to pay in rubles, which Moscow says will help eliminate that costly conversion fee for those states. Russia is interested in pushing the plan for two reasons. First, it would give a real boost to the struggling ruble. Having CIS countries pay in rubles would artificially increase demand for the currency, thus buoying its value. The Russian ruble has been declining steadily, falling 19 percent between July and November. Meanwhile, there have been growing signs that Russians themselves are less confident in the currency, making bank runs in fear of a devaluation and increasingly using foreign currency. The Kremlin has been looking for a way to increase the use of the ruble and is now pushing CIS countries to do so. The second reason for the proposal is to move toward making the ruble the regional currency — thus increasing Russia's influence over the CIS states. Russia is in the process of consolidating control over its former Soviet sphere, and creating a currency dependency and connection would help strengthen its hold over the region. The rubles-for-energy scheme is being presented to the CIS members as an option — for the moment. Potential cost savings aside, however, the CIS states understand the political subtext; they also understand that options presented by Moscow have a way of turning into ultimatums when they are in Russia's strategic interest. But such an ultimatum can only work if the country paying has no other option than to buy Russian energy — which is not the case for most of the CIS. Kazakhstan, Uzbekistan and Azerbaijan are now energy exporters themselves; Tajikistan and Kyrgyzstan receive most of their energy supplies from other Central Asian suppliers; Armenia receives shipments from Iran; and Moldova is hooked into Europe's energy infrastructure through Romania and Ukraine. The only CIS country that is wholly dependent on Russian energy is Belarus — which, while it could theoretically take shipments of some fuels from other sources, pays far below market prices for Russian energy and would take a severe economic hit if it shunned Moscow as a supplier. Belarus has little choice but to adhere to the terms set up by the Kremlin — which would explain why Minsk has already agreed to pay for the oil and natural gas it receives from Russia in rubles. Russia also awarded Belarus a credit of 50 billion rubles (US$2 billion) credit for its energy supplies to sweeten the deal. All the other CIS countries have options, and therefore cannot be forced to accept the rubles-for-energy scheme. Russia could strengthen its argument for switching to the ruble by making it a requirement for all trade, not just energy; but even then, the CIS states would have other options.

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