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. Last Updated: 07/27/2016

Cabinet Split Over Ruble Zone

Deputy Prime Minister Yegor Gaidar and other reformers have clashed with Prime Minister Viktor Chernomyrdin and the Central Bank over plans to allow Kazakhstan to use the new Russian ruble, government sources said Thursday.

Gaidar, who is also economics minister, has said he would consider resigning if the monetary reform is adopted in the form currently proposed, Interfax reported.

A Gaidar spokeswoman said in an interview that disagreement within the government "really is rather serious" and that Gaidar "thinks Kazakhstan represents a grave danger to our financial system".

Chernomyrdin assured the Kazakhs this week that monetary union will happen quickly, promising that Russia will replace old Soviet rubles now in use in Kazakhstan with new Russian rubles within two weeks, Interfax reported.

The Russian Central Bank also supports a quick monetary union, with each old Kazakh ruble worth one Russian ruble, Interfax reported.

Economic reformers fear that currency union with Kazakhstan will tie Russia's economic fate to that of other republics, over which Russia has no economic control.

Russia has had a separate currency since July when the Central Bank suddenly withdrew from circulation in Russia all pre-1993 rubles. This left the republics in the ruble zone with only old, pre-1993 Soviet rubles, while in Russia only new rubles were legal tender.

When it withdrew the old rubles, the Central Bank said one of the main reasons was to force the 10 republics still using the Russian currency to decide whether or not they wanted monetary union and to do so on Russia's terms. It also said supplying the republics with limitless rubles was driving Russian inflation.

The ruble reform led Russia, Kazakhstan, Belarus, Tajikistan, Armenia and Uzbekistan to sign an umbrella treaty in September to form a new ruble zone. The Kazakh parliament approved the treaty Tuesday, becoming the first of the legislative bodies to accept it.

If the merger is to happen, Gaidar and other reformers, including Deputy Prime Minister Alexander Shokhin and Finance Minister Boris Fyodorov, want the republics in the ruble zone to bow to Moscow on all matters of economic policy, bringing their deficit, banking and customs laws in line with Russia, reformers have said.

At the root of the issue is the larger economic and political question over whether the ruble zone should be formed at all. Many reformers want each new country to develop its own currency.

But ruble zone supporters, including the Russian Central Bank, see the zone as a way of restoring shattered trade relations in the former Soviet Union, especially in Central Asia, where Russia is jockeying with China.

Kazakhstan's President Nursultan Nazarbayev is later this month to visit China, which became Kazakhstan's biggest trading partner last year.

Of immediate concern is the rate at which old ruble notes would be exchanged for Russian notes. The issue is becoming critical in Kazakhstan, where inflation threatens to create a ruble shortage, as the old Russian notes it uses are no longer printed.

Kazakhstan has been left with the choice of either issuing its own currency, which it is not prepared to do, or negotiating with Russia for new rubles.

It wants to exchange its old notes on a one-for-one basis with new Russian rubles, said Vycheslav Kovalev, first secretary in the Embassy of Kazakhstan in Moscow.

Reformers say that Kazakh rubles should be swapped at a ratio of three to two, the rate currently set by the Russian Central Bank for Kazakh rubles for trade purposes, reflecting the different economic strengths of the two economies. Kovalev played down the impact the Kazakh economy would have on Russia, saying Russian and Kazakh inflation were equal. He accused Gaidar of creating an issue "that can serve as a justification for future economic failures".