The Mighty Rouble
The Rouble, long ago in the country that was called the USSR, was as solid as a rock. It was, however, a smallish mossy rock, making it soft. It was not convertible, except illegally, and the official exchange rate was unfavourable, at around 70 Kopecks to the Dollar. The unofficial rate varied from 3 to 5 Roubles to the Dollar, available only on the risky black market. The Rouble did have buying power, provided the purchaser in the Soviet Union had access to high quality goods and services. For elite foreign capitalists, like myself, it could work wonders. I lived in Moscow during the early 1980’s in an apartment complex at the World Trade Centre. A restaurant in the lobby of the Mezhdunarodnaya Hotel, in the same complex, was elite and mostly empty. Important people went there, along with expats like me who were not important at all. The menu offered black caviar, fresh from the Caspian Sea, Soviet made champagne, bliny, various cold cuts, salty borzhomi soda water, all for 3 Dollars per person. Included in that price was a bottle of Fanta, bright orange and lukewarm. Fanta was made by Pepsi at the time and had a rightful place next to caviar on the table. I clearly remember talking about how affordable Russia was in those days, a well-kept secret, among many.
Later on, the space where the elite restaurant stood became a bar. After that, it was part of a Japanese restaurant. Now it is used to feed breakfast to tourists staying at a hotel in the complex. A standard hotel breakfast costs 10 times more than the meal with caviar from the early 1980’s, for guests not staying in the hotel. Ah, the good old days.
The small rock on which the Rouble stood was unmoved until 1992. It was stability, of a sort. It was not the kind of stability that creates a currency goliath. Everyone knew the lay of the land. Few expected the Rouble to ever become convertible. It was thought that Soviet Russia was eternal, like the moon. Fortunes were made and spent by companies hoping to arrange some kind of a special currency conversion scheme. I worked for such a company from 1988 until 1992 named the American Trade Consortium. Its business model was based on the idea that the Soviet government would allow the six US corporations in the consortium to convert Dollars and Roubles among themselves and no one else. After several years of business trips, a vast number of toasts to mutual friendship and enough protocols to wallpaper several conference rooms, the consortium was rudely interrupted by the Yeltsin government who one fine day allowed the Rouble to become freely convertible.
In 1992 I went to work for RJR Nabiso, selling cigarettes and Oreo cookies, a compatible assortment if ever there was one. When Yeltsin came to power, events unfolded. At one point the Russians announced the Rouble was convertible at a rate set by the market. The news broke on July 1, 1992. Russia never looked back.
About a week after the big news, I got a call from someone saying he wanted eight 40-foot container loads of cigarettes at the full price, shipped immediately. RJR hadn’t had such an order from Russia in its history at such short notice. I visited the buyer who was sitting in an office building on Novy Arbat Street at a business he called “Aeroflot Bank”. The furniture was unchanged from the Soviet ministry that had apparently moved out about a week before. The buyer had one blue eye and one white eye. He said he would transfer the payment to RJR if I could produce a contract and a pro forma invoice. After scrounging around, I scraped up the documentation. A few days later, RJR got payment. The God of commerce had let loose a bolt of lightning in the form of a convertible currency and I felt like the lightning rod. Benjamin Franklin would have been proud. The export director at RJR was on vacation while all of this high finance was going on. When he came back, I gave him the news. He flew in from Switzerland the same day to meet the buyer the next morning. The buyer announced RJR would need to give him exclusivity for tobacco sales to Russia or the company would never be able to do business in Russia for the rest of its days. We never saw or heard from him again.
For a time, the Rouble went into free fall, descending over time like a roller coaster. For those lucky to be sitting on a product that could be exported to the country, it made no difference. Prices everywhere were denominated in dollars. Eventually, such a denomination was forbidden and sellers switched to something called non-specific denominations, a way to say “Dollar” without using a Dollar sign. The country was fuelled by imports of finished goods filling the vast empty pipeline that was the Russian economy. In the mid 2000’s, the Rouble began to stand on its own. No longer was Dollar pricing used. Today, if the Rouble collapses, prices go up.
Over time, the Rouble became a true rock, as reliable as the flag. This lasted from the mid-2000’s until 2014. It was possible to make an annual prediction of the Rouble exchange rate to the bank and borrow money or obtain corporate blessings for a manager’s budget. Some managers discovered something called a foreign exchange gain. Often, financial results were converted from Roubles and reported in a hard currency such as the Dollar or Pound in the financials compiled at the head office, outside Russia. If the banks and analysts showed the Rouble would average, let’s say, 25 Roubles to the Dollar in a given year, fat could be built into the P&L by predicting an average rate of 28 Roubles to the dollar. If the Rouble in fact delivered the average 25R/1$ rate, the extra 3 Roubles could be reported as 12% additional profit, due to a foreign exchange gain when results were converted on paper into Dollars. This was helpful in paying bonuses to many a General Manager without having to lift a finger.
Up until 2014, the Rouble benefitted exporters. It also supported the tourism industries of many countries around the world with a windfall of Russian tourists. The Rouble made it affordable to travel outside the country. This is less true today. I recently listened to a group of young comedians complaining about their shrinking wages, joking that once upon a time they could go on vacation in France, then Turkey and now, Moscow Oblast.
Today’s leadership of Russia got their feet wet in the Soviet era. In those days, travel outside the country and converting the Rouble to other currencies was not possible or severely restricted, by law. Imports of goods into the country were minimal, allowing local producers to have monopolies. Those days haven’t come back, nor will they (one hopes). On the other hand, if the Rouble weakens, by default, the impact could have a similar effect. Those young comedians will be unable to travel outside Russia due to the cost being too high, not because Russia restricts travel for ideological reasons. Fewer people might sell their real estate in Russia for the purpose of shipping Dollars out of the country because a weak Rouble would produce an uninviting exchange rate. It’s a way of restricting currency conversions without putting pesky laws into effect. Imports become costly, protecting local manufacturers nearly as effectively as sanctions, an event that was a good thing for many companies producing goods inside Russia. These trends would seem tempting to a country’s leadership that wants people to travel inside the country, keep their Roubles in Russian banks and consume locally made goods.
If I were to take the extraordinary position of putting myself in the shoes of Russia’s leadership, it would be tempting to see the precipitous 2014 fall of the Rouble and the sanctions imposed since then as a blessing in disguise. Not only did the weak Rouble protect local manufacturers and feed more Roubles into the budget, derived from hard currency earning exports of raw materials, it came to be accepted by the general populace, however grudgingly. It’s safe to say that the current leadership of Russia is as popular as it ever was. If anything, the opposition to the current administration is weaker than it was when the currency was stronger. As an extra bonus, Russia has put several big-ticket infrastructure projects into play and the Crimea is in Russia’s borders to stay. These are popular among the majority of Russians. More mega projects will undoubtedly be planned and in fact, some are under way already. What happens outside the country is anyone’s guess. Clearly, Russia won’t shrink from the world stage. The trend here seems plain as day, big projects to stimulate the economy, a focus on national unity and a staged approach to a weak Rouble. If sanctions come, the blame game kicks in. It is mighty tempting to see recent history as a winning formula, sanctions included.
Alas, for blood sucking foreign capitalists, the only thing to do is to admit that an economy driven by imports was too good to last. The party had to end and deep down inside, we knew it would. Let’s think as counterintuitively as humanly possible, however strenuous the effort might be. Perhaps the reality of a weak Rouble allows the economy to grow and the little guy can get a fair deal. Maybe substantial growth will resume in Russia. Stranger things have happened.
© Daniel Brooks 27 August 2018