A Payment System Failure and Its Consequences For Interrepublican Trade in the Former Soviet Union

Abstract

The implosion of the Soviet Union coincided with the implosion of trade links between the former republics. We analyse this trade collapse from the point of view of the disintegration of the interrepublican payment system. The objective is to determine whether this payment system failure was indeed a cause of the trade collapse and whether it could have been avoided. First we will analyse how the system for interrepublican payments disintegrated in 1992-1993. We wonder whether this constituted a barrier to interrepublican trade. Then we estimate the loss of trade that was caused by the payment system failure under various scenarios. Expressing this cost in terms of GDP delivers a good approximation of the welfare loss due to the payment system failure. We compare this welfare loss to the historical example of post-WWII Europe. In this historical period, Europe had a disintegrated international payment system, until the problem was fixed by the foundation of the European Payments Union (EPU). At the end of the paper we reconsider the much debated question, whether a Soviet Payments Union (SPU) could have offered any relief. In fact a suchlike institution was conceived and founded but it was never operational. We will describe how the concrete proposal of a SPU looked like and analyse why it failed. In the last section we provide policy conclusions.