Assessing the Feasibility of Monetary Integration in the Former Soviet Republics

Abstract

The disintegration of the USSR brought with it a turbulent period of transition for the newly emerged independent states. This initiated a process of economic decentralisation and a re-allocation of resources. Various regional formations aiming to create a single market or even a common currency area have been proposed amongst the former Soviet states. Despite this, very little in terms of economic integration has been achieved so far. Economies within the CIS are divergent in terms of size and economic structure, with external shocks being more prominent for regional countries. The empirical analysis provided here examines the sustainability of optimum currency area arrangements within the CIS. The results present weak evidence to support monetary arrangements in the region, nonetheless some evidence was found for Russia-Belarus and to some extent Russia-Kazakhstan. Russia remains the dominant, most diversified and advanced economy in the region. In the case of a monetary union with regional countries, the union is likely to happen by absorption. External shocks have divergent effects on regional countries; the differences to a large extent are attributed to the magnitude of responses, further weakening the argument in favour of the OCA in the region.

Keywords:

• Optimum currency area
• CIS
• integration

Notes

¹As stated by the Russian President during the CIS meeting in Kazan (Russia) on 26 August 2005.

²With the exception of Georgia, who joined the organisation in 1993. Turkmenistan has ceased its permanent membership within the CIS and became an associated member of the organisation during the Kazan Summit in August 2005. As of January 2008, the CIS comprises 12 countries, as shown in Table 2 (except for Estonia, Latvia and Lithuania).

³In particular, the post 1997 idea of an Asian Monetary Fund is currently being reconsidered.

⁴By utilising the structural VAR methodology, developed by Blanchard and Quah (1989) and further accommodated to the cases of OCAs by Bayoumi and Eichengreen (1994).

⁵Energy Information Administration (2005). According to the Federal State Statistics Service in August 2005, Russia was producing approximately 9,398,000 of barrels per day. For comparison purposes, it is interesting to note that Saudi Arabia (the world's largest oil producer) was producing 9,520,000 barrels per day over the same time period. The World Bank Report on the Russian economy has suggested that export revenues from oil account for nearly 20% of the country's GDP (World Bank, 2005). In addition, the official energy statistics of the US government have indicated that in the case of Russia, a $1 per barrel change in price of crude oil causes approximately a $1.4 billion increase in Russia's revenues (Energy Information Administration, 2005).

⁶According to the data provided in Bogdanovich (2005), the major exports of Belarus are agricultural machinery and potassium fertilizers. It was also estimated that, as of 2003, the Belarus Metallurgical Plant held 7% of the world production in metal cord (Bogdanovich, 2005).

⁷The test with the lag of one was found to have no significant impact on the results.

⁸The statistical significance of Pearson's correlation coefficients is provided at the statistical significance levels of 1%, 5% and 10%.

⁹Russia is still the largest trading partner of Belarus with over 50% of Belarus’ exports and 70% of imports linked to Russia (CISSTAT; Starr, 2005), a pattern of trade inherited from the USSR period (Bogdanovich, 2005).

¹⁰Director, European II Department, IMF. Speech in Minsk, Belarus, 2 September 2003.