The collapse of intra-regional trade among the successor states of the former Soviet Union (FSU) has led to many proposals modelled on the European Payments Union (EPU) of the 1950s, which allowed multilateral clearing and credits for countries in temporary deficit and helped fuel Western Europe's recovery. In Discussion Paper No. 824, Research Fellow Barry Eichengreen argues that this model is inappropriate for the FSU, since the EPU's principal contribution was rather to strengthen the domestic and international settlements over income distribution and European integration that underpinned post-war growth.

Eichengreen also notes serious flaws in recent proposals for an Interstate Bank. Each member country is to be entitled to credits in proportion to the volume of its intra-FSU trade in a base period, beyond which it must settle in convertible currency. Countries may incur cumulative debts of up to one month of export receipts, so those with high inflation and large oil imports risk rapidly exhausting their credit. Since accounts will be denominated in roubles, other members will have a clear incentive to see that inflation remains high in Russia, which will only obstruct its stabilization.

Eichengreen maintains that only a multilateral clearing union that is based on continuous multilateral balance among member countries can be feasible before stabilization, but this condition is essentially identical to current account convertibility. The FSU member countries must therefore choose between bilateralism and convertibility; Eichengreen advocates moving directly to the latter.

A Payments Mechanism for the Former Soviet Union: Is the EPU a Relevant Precedent?
Barry Eichengreen

Discussion Paper No. 824, August 1993 (IM)