A Harebrained Union

The end of 1998 brought a shock. The presidents of Russia and Belarussia signed an agreement to place a new country on the map of the world: the Russian-Belarussian Union.


After the leaders of Russia, Belarus and Ukraine signed the deal in December 1991 to do away with the Soviet Union, everybody thought that only the most hard-line opposition would still cling to the idea of recreating a union. But since then there have already been three or four attempts to reunite Belarus and Russia, two of the three republics that split apart.


What happened last week was the most portentous step in that direction.


There was even talk of publishing a draft treaty and among the clauses which are already known is one which promises the creation of a unified currency.


Perhaps that point does appear in the draft treaty. But it is likely that each side has a completely different understanding of what it means. And it will take a very long time to bring them to the point where they see eye to eye.


The Belarussian leadership has always turned to the idea of union with Russia in responseto a major worsening in its economic situation, mostly in its currency and finances.


The last time it came up was in the spring of 1998 when the uncontrolled printing of money led to a collapse in the value of the Belarussian ruble - known in common parlance as "the hare."


The only response of the Belarussian government was to limit convertibility of the hare and the free circulation of hard currency.


Trade on Belarussia's nationalized currency exchange was stopped. The Belarussian ruble balances in Russian bank correspondent accounts were frozen. Belarussian President Alexander Lukashenko appeared on television to blame it all on speculators in Moscow's banks and stock exchanges.


The Moscow Interbank Currency Exchange replied by suspending trade in the hare. Back home the currency continued to fall. And by coincidence it was just then that Belarussia returned to the idea of a union of the two currency systems.


To start talks, Belarus asked for a credit to stabilize its national currency. Russia was expected to act as a sort of International Monetary Fund. With a heavy dose of irony, Russia set up a working group to consider a program of macroeconomic stabilization, which was up to the Belarussians to work out.


Of course, by that time Lukashenko's relations with the real IMF had gotten so bad that the fund closed its office and pulled out its staff. No program was worked out, nor indeed could it have been.


The negotiating strategy of the Belarussians was always based on the principle, "We are poor but proud." Give us money but do not limit our sovereign right to spend it as we like and then come back to ask for more.


In 1994, talks on unification of the two currency systems were almost completed. The details were already being worked out. But it all got bogged down when Belarus refused to give up its right to print money in the name of its own national bank.


But if there were a unified currency - call it a ruble or a hare or a Belarussian dollar - how could it operate if two central banks, one in Minsk and the other in Moscow, were allowed to print it ?


No need to imagine what it would be like. That is exactly what happened in the Soviet Union in 1990 and 1991. Then, each of the 15 constituent republics had the right to print Soviet rubles. You don't have to be a macroeconomist to realize that in that situation the country which prints the most money the fastest will do best. It will take the bulk of the profits from inflation. This system is inherently unstable and breaks down into hyperinflation, as happened with the Soviet Union.


But just say, for example, the Belarussians shut down their national bank. There is also the budget question.


Up until now, the budget of Belarus has been topped up with loans from the National Bank. In other words, by printing money. Since that would be impossible in the new union, Lukashenko would have either to put together a balanced budget or ask Russia for subsidies.


The former is probably impossible. The latter would reduce Belarus from the level of an equal partner in the union to that of a regional government unit within Russia.


All this means that there can be only one economically and financially stable form of unification. This was the system worked out when Puerto Rico was annexed by the United States. It did not allow for a national bank or budget based on printing money. It leaves no attributes of financial sovereignty except for a local government and a separate telephone code. But it is unlikely Belarus will go for this Puerto Rico option.


That doesn't mean Russia will break off talks. It is very tempting to open up another "window on Europe" and stick oil and gas pipelines through it. That would teach the Balts and Ukrainians, who now control export pipelines, their natural place in the international division of labor.


This is no joke. The oil and gas lobby in Russia is still powerful. The government has to take into account the opinions of Gazprom, LUKoil and the rest. Their ideas carry a lot more weight than the opinions of the Finance Ministry and the Central Bank.


Irina Yasina is a former press secretary for the Russian Central Bank.