The Russian demonetization episode of 1993-1998 and its lessons for Greece

Before the 1998 crash, the Russian economic situation was marked by a number of important features indicating a trend toward a kind of return to a barter economy . That made her especially vulnerable to collapse. This demonetization was both a process of creating an alternate payment system and, in some case, a genuine attempt to create parallel currencies leading to a genuine fragmentation of the Russian monetary space .
First, a large proportion of economic transactions were conducted through barter—by most estimates, at least 50% by May 1998 . But a significant part too was conducted in Veksels, which were theoretically a credit instrument between two agents without the possibility of transforming the instrument in money. This can be seen from the following table data of which were compiled by a Russian scholar. What is particularly impressive in the following table is the growth of barter trade at a time when inflation (end of course inflationist expectations) decreased a lot.

Table I
Share of barter trade and Veksel use in inter-enterprise trade in Russia from 1993 to 1997 in %
Barter share in 1993 Barter share in 1997 Share of trade using Veksels 1997
Chemicals 21 52 14
Metal working 14 46 8 / 5
Mechanical constructions 12 41 10
Wood and paper 12 46 8
Construction materials 11 59 13
Fuel 10 33 26
Textile and clothes 8 42 9
Food processing 6 25 5
Power generation 4 46 n.d.
Source : Rozanova M., (1998), “Al’ternativnye formy finansovyh rascetov mezhdu predprijatijami”, in Problemy Prognozirovanija, n° 6, pp. 96-103, p. 98.
In the Veksel column for 1997, the first figure for metalworking is for iron and ferrous metal and the second figure for non-ferrous metals.
As a matter of fact, if we add up barter and Veksels, between 60% and 70% of the inter-enterprise trade was done out of the ruble . It has to be added that enterprises were not alone to issue Veksels. Some regional administrations did so to pay regional civil servant. And, these “regional” Veksels could be transformed into rubles. In the end, perhaps as much as 25% of transactions was conducted in Veksels, some of which have been emitted by regional authorities and were no more than proxy currencies or even regional currencies-in-the-making. Then, the border between what could be an alternative payment system and a genuine parallel currency became blurred. Actually, using official income and saving data we could see that the use of the ruble was steadfastly decreasing in some regions. The dual use of barter and Veksels led to a creeping demonetization of a part of Russia.
It is also important to note that demonetization increased simultaneously with the decrease in the inflation rate. Thus, barter was not a reaction to fears of a loss of value of the national currency. Rather, it was generated by fears of defection in transactional relations , induced by a shortage of liquidities that favoured the actor who held money in any transaction. This has important and significant implications if we look at Greece today. Quite obviously the Greek economy is facing, and has faced since the end of June, an important shortage of liquidity. It is to be seen to what extent this would lead to the spontaneous creation of parallel payment systems like in Russia in 1993-1998. But it is also to be seen to what extent these systems, if created, are to lead to a massive tax-evasion and to induce a process of economic and then political fragmentation like the one which took place in Russia before the 1998 crash. Thus, the macroeconomic policy geared toward fighting inflation has largely destroyed money as an institution in Russia.
The rapid decrease of barter after the 1998 crash is also noteworthy. Barter trade went down to 26% in September 2000 and the use of Veksels also retreated. This was to a very large extent the product of two major changes. First, following the process of State rebuilding initiated by the then Prime minister Mr. Evguenny Primakov transactions were more and more effectively enforced and confidence between economic agents progressively returned . Second, liquidity was increasing in Russia, partly because the Central Bank policy had been less stupidly rigid it was before the crash and partly because the economic rebound Russia witnessed after the crash implied more profits and enterprises financial situation improvement .
An important lesson from Russia for Greece is then the value of the link between liquidity flows and institutional stability and the stability of monetary relations. A second important lesson is that “austerity” policies when implemented without a view on the actual situation could well generate the opposite of what they are aimed at .

To Mstislav: It is explained in the text

To all,

Thanks a lot for your comments.
I would certainly be more explicit about the “Soviet” and “Russian” experience. As a matter of fact we have to separate the issue of parallel payment systems and parallel currencies. More of that in next days.

In the Fall of 2011 I proposed an electronic system of multilateral barter transactions that was analyzed further in Economopoulos (2012b) and in Economopoulos and Mavrikis (2012) that led to the development of a group of economists, financial professionals and computer analysts that is based in London and is currently designing this system whose prototype is near its stage of release.

This is an electronic system of multilateral cycles of barter transactions of small and medium size enterprises that encounter liquidity, credit rationing and inventory problems that were significant during the liquidity fragmentation and asphyxiation present during the operations of common currency area, currency board, and fixed exchange rate and commodity standards regimes. However, these problems remain and could be substantial and intensified in the presence of a new currency regime. The proposed electronic system creates either virtual and customer based transaction cycles which are closed and cleared by matching a series of bilateral transactions that are a combination of generated vertical/production conversions of product inputs and allocated horizontal/market substitutions of product outputs. The system is capable to clear mismatches with suggested price/quantity adjustments and settle remainder gaps with internally generated trade credit subject to the credit rating of participating units. The system schedules distribution allocation based on transportation opportunities subject to minimum delivery cost. This system facilitates production, trade and distribution transactions utilizing unused and misallocated inventories from market inefficiencies and liquidity constraints of the new currency in order to reduce the bottlenecks from financial fragmentation and credit worthiness limits of loan extension. The utilization of this system enhances commercial trade activity, production expansion and eases problems of transmission of the new currency as its application is based on alternative complementary barter transactions.

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