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. Last Updated: 07/27/2016

Ruble Zone: The End of A Bad Idea

Both Russia and the republics of the CIS have shown a welcome awareness of their status as independent nation states by breaking off their negotiations over plans for a new six-nation ruble zone.

The new ruble zone promised to be as much of a disaster as the old Soviet one which produced confusion over who controlled the issuance of money and credit, causing inflation to skyrocket.

Russia was eventually forced to cut itself off financially from the other republics to protect its own currency. But the pressure to create some sort of currency union proved too great and in September, Russia and five other former Soviet republics again decided to form a currency union.

The impulse for the creation of such a zone was always a strange mixture of politics and economics. Politicians in Russia saw the new ruble zone as a symbolic example of Russia's leadership in the CIS.

The ruble zone republics, on the other hand, were happy to accept Russian economic dominance because it offered obvious benefits like continued access to cheap oil and because they did not expect that Moscow would ask for much in return.

But Russia decided there was a price to pay: If the republics wanted to use the ruble they would have to subordinate their economies to Russia's. The republics decided the price was too high.

It was a case of "real economics" at work. The right to issue currency is one of the key powers of governments and that issue forced both sides to make choices based on economic realities.

For Russia, the move shows a new understanding of bow nation states can protect their economic interests and marks a welcome break with past bad habits. The Soviet Union spent billions on client states in the name of vague foreign policy goals, ignoring the huge costs to the Soviet economy.

The only long-term basis for Russia's economic relations with its neighbors in the old Russian Empire is a mutual acceptance of sovereignty. If economic ties are to persist, it must be on the basis of mutual national self-interest and economic expediency.

In monetary terms, this means encouraging the republics to move as quickly as possible to issue their own currencies and then establish an efficient and clear mechanism to exchange them for rubles.

This should involve the setting of some predictable exchange rates between republican and Russian currencies and an inter-republican clearing system.

A clear-cut currency system will do more to help inter-republican trade than the ponderous and ill-defined shared currency system that was being planned. It will also leave each of the republics free to control its own economic destiny, with or without Russia.