A Single EAEU Currency: Why It Is Premature and Dangerous

I have been out of touch with economic events in the country for a while. Everyone is now actively discussing the introduction of a single currency across the member states of the Eurasian Economic Union (EAEU).

A decision to introduce a single currency would be premature and ill-considered.

The euro shows how many problems a single currency creates for the eurozone, even though introducing it in the EU took decades.

The fundamental problem with a single currency shared by different countries is the difference in their rates of labor productivity growth. Countries with high labor productivity benefit from a common currency.

In the EU, for example, the single currency benefits Germany and France, where labor productivity grows quickly. Other EU countries can no longer use a national currency to protect their own producers. This means Germany and France can sell their goods across the EU without real competition from domestic producers. Less developed EU countries, for their part, can export cheaper labor to the more developed ones.

Incidentally, this is why many EU countries, such as Poland and Bulgaria, do not use the euro: by devaluing their own currencies, they can always support their producers.

Currency integration also complicates monetary policy, because compromise decisions are hard to reach. In the EU, decisions are deliberate and balanced, since there is no single dominant leader. In the EAEU, decisions would depend heavily on one country, which completely changes the very essence of a single currency.

Whatever we call a single EAEU currency, whether the altyn, the Eurasian ruble or something else, in essence it would be the Russian ruble. The largest economy will determine EAEU monetary policy, even if we seat our own deputy chairman or anyone else on the board.

Moreover, our financial systems, including our banking systems, are very different. A single currency would require deeper integration of the EAEU countries' banking systems, as well as equal rights and opportunities for Kazakhstani banks in Russia. That would take not one year but decades.

There is another point. With a single currency, the incomes of Kazakhstani citizens would depend not on us but on Russia, because any unjustified devaluation hits ordinary people. Exiting the union after even deeper integration would be harder still, since withdrawing the new currency from circulation would not be a simple matter.

Our economic structures are very different, both Kazakhstan's and those of Russia and Belarus. Of the three countries, Kazakhstan has the most commodity-dependent economy, so we are exposed to global commodity prices. Russia also depends on commodity prices, but manufacturing and the defense sector account for a very large share of its economy.

Russia is our main trading partner, especially for imports of goods and services. However, most of our imports still come from other countries, with which we settle in US dollars or euros.

That raises the question of inflation. With a single currency, we would constantly import inflation from Russia, and we could forget about inflation targeting.

I see only one advantage: our producers would not suffer from a cheap ruble. But the public would not be happy about falling incomes in terms of a more liquid currency, the US dollar, if the Eurasian ruble depreciates. This is also a double-edged sword. Whether we like it or not, labor productivity in manufacturing is higher and growing faster in Russia and Belarus. So when the time comes that our producers are suffering because we share a currency, we can forget about Kazakhstan's industrialization and resign ourselves to remaining a commodity-based country. Think at least 10 years ahead, rather than looking to the past.