MONETARY AND BANKING SYSTEMS OF THE CENTRAL EURASIAN COUNTRIES IN THE CONTEXT OF THE WORLD FINANCIAL AND ECONOMIC CRISIS
Abstract
The financial crisis that has shaken the world dealt a rather hard-felt blow to the economy of the Central Eurasian countries, thus aggravating its weaknesses and ailments. Some countries in this group are keenly feeling the consequences, which are expressed primarily in imbalances in their monetary and banking systems, as well as in decreased trade, tougher conditions for acquiring funds in the world financial market, and so on. The independence of the market economies of the Central European states has made it possible for different scenarios to be enacted for developing and integrating the above-mentioned systems in conditions of financial globalization. Various opinions are being expressed on this account, thus making this a pertinent research topic in the context of the growing dynamism of the processes designed to achieve closer cooperation in the financial and currency spheres.
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See: D. Daianu, L. Lungu, “Why Is This Financial Crisis Occurring? How to Respond to It?,” TIGER Work Paper Series, No. 113, Warsaw, July 2008; N.P. Goriunova and P.A. Minakir, Finansovye krizisy na razvivaiush-chikhsia rynkakh. Nauka Publishers, Moscow, 2006; Z.F. Mamedov, Anatomiia finansovogo krizisa. St. Petersburg State University, St. Petersburg, 2005; A.G. Carstens, D.C. Hardy, C. Pazarbasioglu, “Avoiding Banking Crises in Latin Amer-ica,” Finance&Development, Vol. 41, No. 3, 2004, pp. 30-33; I.K. Kovzadadze, Sistemnye bankovskie krizisy v usloviiakh finansovoi globalizatsii, ed. by Vl. Papava, Tbilisi University Publishers, Tbilisi, 2003; A.V. Anikin, Istorii finansovykh po-triaseniy. Rossiyskiy krizis v svete mirovogo opyta, Olimp-Biznes, Moscow, 2002; C.P. Kindleberger, Manias, Panics, and Crashes: A History of Financial Crises, J. Wiley, New York, 2000; B. Eichengreen, A. Arteta, “Banking Crises in Emerg-ing Markets: Presumptions and Evidence,” CIDER Working Paper, No. 115, Center for International and Development Economics Research (University of California, Berkeley), 2000; S. Fischer, The Asian Crisis: A View from the IMF, Ad-dress by First Deputy Managing Director of the International Monetary Fund at the Midwinter Conference of the Bankers’ Association for Foreign Trade, Washington, D.C., 22 January, 1998; A. Demirguc-Kunt, E. Detragiache, “The Determinants of Banking Crises in Developing and Developed Countries,” IMF Staff Papers, Vol. 45, No. 1, 1998, pp. 81-109; J. Sachs,A. Tornell, A. Velasco, “Financial Crises in Emerging Markets: The Lesson from 1995,” Brookings Papers on Economic Activity, 1996. No. 1, and others.
For instance, the World Bank, compared to its previous report (see: Global Economy Prospects 2009: Commodi-ties at the Crossroads, The International Bank for Reconstruction and Development / The World Bank, Washington, D.C.,20 November, 2008), gave worse forecasts of the slump in the world economy in 2009 from 1.7% to 2.9% and described the prospects for its development as extremely indefinite (see: Global Development Finance: Charting a Global Recovery,The International Bank for Reconstruction and Development / The World Bank, Washington, June 2009). Similar pessimistic statements are seen in the reports of the International Monetary Fund (see: World Economic Outlook: Crisis and Recovery,IMF, Washington, D.C., April 2009) and the Asian Development Bank (see: Asian Development Outlook 2009, Asian De-velopment Bank, Manila, March 2009).
See: Global Development Finance: Charting a Global Recovery, pp. 110-118.
See: Ibid., pp. 2, 9.
Ibid., pp. 115, 117-118.
Attention is focused on this in particular in: N.A. Nikolaev, T.E. Marchenko, M.V. Titova, Strany SNG i mirovoi krizis: obshchie problemy i raznye podkhody, Analytical Report, FBK, Moscow, June 2009, p. 8.
The report of U.N. Secretary-General Bang Ki-moon at a U.N. Conference on the Problems of the World Finan-cial and Economic Crisis and its Impact on Development points out this trend (New York, 24-26 June, 2009) (see: The World Financial and Economic Crisis and its Impact on Development, Report of Secretary-General, pp. 5-6, available at [http://
ww.un.org/ga/ econcrisissummit/docs.shtml]).
Standard & Poor’s points this out in particular (see: “Kazakh, Russian, and Ukrainian Banks Face Another Tough Year of Poor Asset Quality and Thin Liquidity,” S&P, 18 May, 2009, available at [http://www.standardandpoors.ru]).
See: “Russia, Kazakhstan, and Ukraine: Counting the Cost of the Crisis,” S&P, 29 May, 2009, available at [http://www.
tandardandpoors.ru].
For more on these processes, see: E. Ismailov, “National Currencies of the Central Eurasian Countries in the Context
of Financial Globalization,” in: Central Eurasia: National Currencies, Press, Stockholm, 2008, pp. 17-20.
With respect to the separatist policy of Abkhazia, South Ossetia, and Samtskhe-Javakhetia.
With respect to the separatist policy of Transnistria.
The rating of developing countries and countries with a transition economy in terms of degree of partial dollari-zation was compiled by the Center of Economic Research of the Moscow International Institute of Econometrics, Information Technology, Finance, and Law according to the method of the U.S. National Bureau of Economic Research. In compliance with this method, the level of dollarization is determined by the percentage of household and company funds kept in inter-national assets and how many loans the state and companies have in foreign currency. The summary index of dollarization is used to evaluate partial dollarization, calculated as the sum of three variables: (1) ratio of bank deposits in foreign cur-rency to the broad money aggregate; (2) ratio of foreign debt to the country’s GDP; (3) percentage of debt of the private sector in the country’s total external debt. The data bases of Global Development Finance (World Bank), International Fi-nancial Statistics and World Economic Outlook database (IMF), and Joint OECD-BIS-IMF-World Bank Statistics as of March 2005 served as the initial data.
See: M. Savastano, “Dollarization in Latin America: Recent Evidence and Policy Issues,” in: The Macroeconom-ics of International Currencies: Theory, Policy and Evidence, ed. by P. Mizen, E.J. Pentecost. Edward Elgar, Glouces-tershire, 1996; T. Balino, A. Benett, E. Borensztein, “Monetary Policy in Dollarized Economies,” IMF Occasional Pa-per, No. 171, 1999; J. Mongardini, M. Johannes, “Ratchet Effects in Currency Substitution: An Application to the Kyr-gyz Republic,” IMF Working Paper, WP/99/102, 1999; S.P. Moiseev, “Ekonomika dollarizatsii,” Digest-Finansy, No. 10,2000, pp. 9-13; I. Vetlov, “Dollarization in Lithuania: An Econometric Approach,” BOFIT Discussion Papers, 2001/1;R.V. Piont-kovskiy, “Dollarizatsia, izmenchivost infliatsii i nerazvitye finansovye rynki v perekhodnykh ekonomikakh,” in:
onsortsium ekonomicheskikh issledovanii i obrazovania. Nauchniy doklad No. 03/02, EERC, Moscow, 2003, p. 7; S. Hey-sen, “Dollarization: Controlling Risk Is Key,” Finance & Development, Vol. 42, No. 1, March 2005, pp. 44-45.
The evolution of the national currencies in the CEA countries occurred in two stages. At the first stage, that is,during the first years after state independence was gained, full-fledged currencies were put into circulation in Afghanistan,Armenia, Azerbaijan, Kazakhstan, Kyrgyzstan, and Turkmenistan, as well as intermediate currencies in Belarus, Georgia,Ukraine, Uzbekistan, and Tajikistan. They had a low degree of security and during the same period became extremely de-valuated due to hyperinflation. The second stage is characterized by redenomination of the currencies, which promoted a qualitative improvement in the monetary economy. In the first group, redenomination was carried out in Afghanistan (Oc-tober 2002) and Azerbaijan (January 2006), that is, old money was exchanged for new at a rate of 1,000:1 (afghani) and 5,000:1 (manat). In the second group, the first full-fledged national currency was issued in Georgia (September 1995), the lari, with a coefficient of 1,000,000:1, and in Uzbekistan (July 1994), the soum, at a rate of 1,000:1. In Belarus, where in 1992-2000 20 types of banknotes in 18 denominations were issued, redenomination occurred twice: in August 1994 at a rate of 10:1, and on 1 January, 2000, at a rate of 1,000:1. And, finally, a new national currency was introduced in Tajikistan (October 2000), the somoni, which was converted in relation to the previous Tajik rubl at a rate of 1:1,000. In some CEA countries, the national banks (Georgia and Azerbaijan) introduced their currency in keeping with the concept “A single money family,” which met international standards both in design and denomination.
Apart from Afghanistan.
Apart from Afghanistan, Turkmenistan, and Uzbekistan, whose banking systems are closed in nature.
In several cases, as for example in Azerbaijan, the drop in the financial intermediation and capitalization index was due to the high economic growth rates.
See: “Banking Systems of the CIS Countries: Different Prospects, but the Same Risks,” S&P, December 2004.
For more detail, see: N. Muzaffarli (Imanov), Reiting Azerbaidzhana v mezhdunarodnykh sravnitelnykh issledova-niakh, Kavkaz, Baku, 2006, pp. 364-370; idem, “Comparative Economic Competitiveness of the Central Caucasian States,”The Caucasus & Globalization, Vol. 1 (4), 2007, pp. 75-76.
See: Bank Systemic Risk Report, April 2008, Fitch; Bank Systemic Risk Report, September 2007, Fitch, available at [http://www.fitchratings.com].
For more detail on international assessments of Azerbaijan’s banking system, see: F. Murshudli, “Azerbaijan Bank-ing System: Challenges and Prospects of Globalization,” The Caucasus & Globalization, Vol. 2, Issue 2, 2008, pp. 79-87;idem, “Mezhdunarodnye otsenki bankovskoi sistemy Azerbaidzhana—vazhnyy indikator ee integratsii v mirovoi finansovyy rynok,” Banki i biznes, No. 2, 2008, pp. 46-53; V. Fakhri, “Fitch Ratings: Azerbaidzhan vse eshche v spiske autsaiderov mirovoi bankovskoi industrii,” Banki i biznes, No. 2, 2008, pp. 42-45.
See: Bank Systemic Risk Report, April 2008, Fitch; Bank Systemic Risk Report, September 2007, Fitch.
For more detail, see: “Russia, Kazakhstan, and Ukraine: Counting the Cost of the Crisis”; “Kazakh, Russian, and Ukrainian Banks Face Another Tough Year of Poor Asset Quality and Thin Liquidity.”
See: [http://www.fitchratings.com]; [http://www.moodys.com]; [http://www2.standardandpoors.com/portal/site/sp/
n/eu/ page. my_homepage].
The Bretton Woods currency system (1944-1978).
This is particularly pointed out in: M. Ershov, Ekonomicheskiy suverenitet Rossii v globalnoi ekonomike, Ekonomi-ka, Moscow, 2005, p. 12.
For more detail, see: E. Ismailov, M. Esenov, “Central Eurasia in the New Geopolitical and Geo-Economic Dimen-sions,” in: Central Eurasia 2005. Analytical Annual, CA&CC Press, Sweden, 2006, pp. 11-43.
After the collapse of the Soviet Union, the CEA states became an active hub at the meeting point of the three su-per civilizations (the Western-Christian, the Muslim, and the Chinese-Confucian) (see: S.P. Huntington, The Clash of Civilizations and the Remaking of World Order , Simon & Schuster, New York, 1996, 368 pages).
For more detail, see: E. Ismailov, “Central Eurasia: Its Geopolitical Function in the 21st Century,” Central Asia and the Caucasus, No. 2 (50), 2008, pp. 7-29.
In 2007, the average daily turnover of exchange transactions in the world market topped 3.2 trillion dollars (see:
Triennial Central Bank Survey: Foreign Exchange and Derivatives Market Activity in 2007,” in: Bank of International Settlements, December 2007, p. 4).
Exceptions are non-oil contracts with EU countries, as well as, partially, settlements with Russia. For example,according to experts of Dresdner Bank, the percentage of euros in servicing world export approximately corresponds to the export volume of the European Union countries in the total volume of world export (see: [http://www.dresdner-bank.de]).
See: CIA-2008 The World Factbook.
See: World Economic Outlook Database, October 2008.
Ibidem.
SDR currencies: U.S. Dollar, Euro, U.K. Pound, Japanese Yen.
See: [http://www.president.gov.by/press24211.html]. Acceptable technical deviations within 3%.
See: [http://www.nbrb.by/press/?action=search].
In this case, we are regarding globalization as the result of the previous stages of the foreign economic activity of states, regions, and continents, on the one hand, and as a specific phase in the rapprochement and interdependence of na-tional economies, on the other.
See: M.D. Bordo, L. Jonung, An Analysis of the Long-Run Behavior of the Velocity of Circulation, Transactions Publishers, New Brunswick, London, 2003; idem, Lessons for EMU from the History of Monetary Unions, The Institute of Economic Affairs, London, 2000.
For example, the U.S.S.R. and the U.S.S.R. State Bank.
For example, in the Scandinavian Monetary Union the central banks of Sweden, Norway, and Denmark had a single currency unit—the Scandinavian krone, whereby each of them issued its own krone that freely circulated in the Union member states.
American economist R. Mundell developed a theory of optimal currency areas at the beginning of the 1960s (for more detail, see: R.A. Mundell, “A Theory of Optimum Currency Areas,” American Economic Review, Vol. 51, LI, 1961,pp. 657-665).
The theory of optimum currency areas elaborated by R. Mundell was developed in the works of R.I. McKinnon,P. Kenen, E. Tower, T.D. Willet, et al. (see, in particular: R.I. McKinnon, “Optimum Currency Areas,” American Eco-nomic Review, Vol. 53, LIII, 1963, pp. 717-725; P. Kenen, “The Theory of Optimum Currency Areas: An Eclectic View,”in: Monetary Problems in the International Economy, University of Chicago Press, Chicago, 1969, pp. 41-60; E. Tower, T.D. Willett, The Theory of Optimum Currency Areas and Exchange Rate Flexibility. Special Papers in International Eco-nomics. International Finance Section, Princeton University, Princeton N.J., 1976).
Calculated on the basis of the following data: Statistical Yearbook of Azerbaijan 2007, Sada, Baku, 2007, p. 495.
For more detail, see: A.A. Abalkina, “Bankovskoe vzaimodeistvie stran SNG,” in: Predposylki, problemy i per-spektivy finansovogo vzaimodeystviia na postsovetskom prostranstve, The Center for Globalization and Integration Prob-lems, Institute of Economics, Russian Academy of Sciences, Moscow, pp. 46-66; E.A. Kliushova, “Vzaimodeystvie ucha-stnikov i organizatorov fondovogo rynka v SNG,” in: Predposylki, problemy i perspektivy finansovogo vzaimodeystviia na postsovetskom prostranstve, pp. 67-90; E. Ismailov, F. Amirbekov, “Kavkazkaia universalnaia birzha: mekhanizm intergratsii Tsentralnogo Kavkaza,” Izvestia of the Georgian Academy of Sciences, Vol. 11, No. 4, 2003.
There are no corresponding data for Turkmenistan.
IMF—World Economic Outlook Database, October 2008.
R.S. Greenberg, “Perskpektivy valiutnoi integratsii na postsovetskom prostranstve,” in: Formirovanie integratsion-nykh ob’edinenii stran SNG: finansovyy, valiutnyy, bankovskiy aspekty, Finansy i statistika, Moscow, 2006, p. 179.
See: CIA-2008 World Factbook.
See: M. Chinn, J. Frankel, “The Euro May Over the Next 15 Years Surpass the Dollar as Leading International Cur-rency,” available at [http://ksghome.harvard.edu/~jfrankel/EuroVs$-IFdebateFeb2008.pdf], 13 February, 2008; J. Frankel, “The Euro Could Surpass the Dollar within Ten Years,” available at [http://www.voxeu.org/index.php?q=node/989], 18 March, 2008;V.Ya. Pishchik, Evro i dollar SShA. Konkurentsiia i partnerstvo v usloviiakh globalizatsii, Konsaltbankir, Moscow, 2002;
Mundell, The Euro and the Stability of the International Monetary System, Columbia University, January 1999, § 6.
See: Debating China’s Exchange Rate Policy, ed. by M. Goldstein, N.R. Lardy, Peterson Institute, Washington, 2008,399 pp.; D. Burton, A. Zanello, “Asia Ten Years Later,” Finance&Development, Vol. 44, No. 2, June 2007, pp. 22-25;N.G. Shchegoleva, R.G. Malsagova, Kollektivnye valiuty: sovermennaia arkhitektura i tendentsii razvitiia, Market DC, Mos-cow, 2006, 288 pp.; A. Prakash, “Envisioning a Single Asian Currency,” International Herald Tribune, 28 March, 2006;H. Kuroda, The Rises and Falls of Currencies, Tokyo, 2005 (in Japanese); Japan and China: Cooperation, Competition and Con-flict, ed. by G.H. Hilpert, M. Gurian, Palgrave Macmillan, Hampshire, 2002, 233 pp.; R. Taylor, Greater China and Japan: Pros-pects for Economic Partnership in East Asia, Sheffield Centre for Japanese Studies/Routledge Series, London, 1996, 228 pp.
The possibility of creating an Asian currency unit was expressed by President of the Asia Development Bank H.
uroda (see: H. Kuroda, op. cit). In his opinion, efforts should be made in this direction as the region moves toward economic integration, including the establishment of a free trade area. This currency unit will be a currency index of 13 coun-tries of the ASEAN+3 countries (member states of the ASEAN plus Japan, China, and South Korea). In addition to quot-ings, according to H. Kuroda, the index will express the GDP level, foreign trade volume, and level of participation in in-ternational settlements. As the countries of this group integrate (in the future Hong Kong and Taiwan may also join), the ACU will become a single Asian currency which could eventually become as strong as the euro (see: A. Prakash, op. cit.).
See: R.A. Mundell, “The Case for a World Currency,” Journal of Policy Modeling, Vol. 27, Issue 4 (June), 2005,pp. 465-475. This plan comprises three stages: 1) stabilization of the dollar, euro, and yen exchange rates (establishment of ceilings and floors on the exchange rates of these currencies in relation to each other); 2) strict fixation of the dollar, euro,and yen exchange rates, creation of a currency unit DEY (Dollar, Euro, Yen) and of a common central bank based on a basket of these currencies (with specified weights) in order to carry out a single monetary policy in the region aimed at achieving price stability, preliminarily coordinated with the FRS, European Central Bank, and Bank of Japan with respect to a com-mon index for measuring inflation and a mechanism for distributing seigniorage; 3) introduction of a global curren-cy (R. Mundell called it INTOR) that could be calculated on the basis of a world basket including several (but no more than five) of the world’s leading and most stable currencies, in particular on the basis of the DEY unit, with the possibility of adjusting the composition of the currencies in it.
See: M. Josh, “Gulf States to Adopt a Single Currency? Casting a Wary Eye at Europe, Members of the Gulf Co-operation Council are Moving forward Plans to Adopt a Common Currency,” Business & Finance, May 2002, available at [http://goliath.ecnext.com/coms2/summary_0199-1685468_ITM]; Ekspert Kazakhstan, No. 16 (164), 21 April, 2008; The Georgian Times, 19 June, 2008.
All the CEA countries, apart from Georgia and Armenia, belong to the ECO.
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