The Zhirinovsky redenomination

Introduction


Should and can a loaf of bread in Russia become worth a few kopecks, like it used to during the Soviet period? Can a new rouble bring a new life to Russian people?


The promise of redenomination


Vladimir Zhirinovsky, the leader of the nationalistic Liberal Democratic Party of Russia (LDPR), and a candidate for the 2018 presidential election, promised to introduce a new rouble through redenomination. In case of his victory, the U.S. dollar would be worth 60 new kopecks (100 U.S. Dollars would be equal to 60 new roubles). Why might some voters support redenomination? What are its pros and cons?


The benefits and costs of redenomination


Redenominations are usually conducted after or under hyperinflation. Before redenominating, fiscal and monetary reforms should be conducted to ensure macroeconomic stability.

Redenomination has many benefits. Unlike revaluation, when central bank interventions strengthen the national currency under a fixed exchange rate, redenomination, by itself, does not change the purchasing power of customers, being only a change in the units of measurement. Yet some citizens associate redenomination with revaluation, and feel satisfied. Under hyperinflation, citizens substitute foreign currency for national currency, making monetary policy ineffective. National currency credibility makes the government credible in the eyes of its citizens. Also, redenomination reduces the illusion of having large money that may generate inflationary pressures.

Redenomination has costs and risks. There are menu and administrative costs, such as those of changing prices and introducing new regulations. There are costs to printing and minting new money, disposing of the old notes and coins, and informing citizens. There are psychological effects of people feeling that they earn less now. Inflation may put some or all zeros back into prices. Also, mistakes are possible in estimating the needed redenomination ratio.


Justification and appeal to Russian voters

Inflation is slowing down, having peaked in 2015. After declining in 2015 and 2016, real GDP is expected to grow. Table 1 illustrates key macroeconomic parameters for the period 2013-2017.

   

Parameter/Year	2013	2014	2015	2016	2017P
Real GDP growth, %	1.79	0.74	-2.83	-0.23	1.8
Inflation, end of period, %	6.47	11.35	12.91	5.37	3.97
World oil monthly price, Brent crude, end of year	110.67	62.33	37.72	54.07	n/a
Average nominal monthly salary, end of year, roubles	39,648	42,136	43,408	47,554	n/a

P=projected

Sources: October 2017 IMF World Economic Outlook Database, Federal Service of Government Statistics and IndexMundi.

Table 1 : World Oil Prices and Selected Macroeconomic Indicators of the Russian Federation (2013-2017)

Many Russians remember the monetary reform of January 1, 1998, when the Russian rouble was redenominated, with the new rouble being worth 1,000 old Russian roubles. As shown by Table 2, before the 1998 redenomination, inflation was incomparably higher than now. The figures for the nominal monthly salary in the two tables (it fell to 33,347 in October of this year, according to the Federal Service of Government Statistics of Russia) suggest that money illusion is not an issue now. In contrast, in the 1990s, the average Russian would be a rouble millionaire, in spite of low purchasing power. Furthermore, inflation, caused by the depreciation of the rouble under the August 1998 financial crisis, eliminated some of the benefits of redenominating. Nowadays, there is also some risk that unfavorable trends in world commodity markets or new sanctions will weaken the rouble and stir inflation.

Parameter/Year	1994	1995	1996	1997	1998
Real GDP growth, %	-12.7	-4.1	-3.61	1.38	-5.35
Inflation, end of period, %	307.63	197.47	47.74	14.77	27.67
World oil monthly price, Brent crude, end of year	15.96	17.96	23.90	17.00	9.80
Average nominal monthly salary, end of year, roubles	354,200	735,500	1,071,100	1,214,800	1,482*

*Measured in new Russian roubles.

Sources: October 2017 IMF World Economic Outlook Database, Federal Service of Government Statistics and Index Mundi.

Table 2 : World Oil Prices and Selected Macroeconomic Indicators of the Russian Federation (1994-2008)

Though macroeconomic parameters do not justify redenomination, this promise may be appealing to voters with Soviet nostalgia, together with Zhirinovsky’s promise to continue restoring Russia’s geopolitical influence. Older Russians remember the period from 1961 until Gorbachev’s perestroika, when basic products were sold for several kopecks, and the exchange rate of the rouble was 100 U.S. Dollars for 53.35 roubles, i.e. 1 U.S. Dollar was worth 53.35 kopecks, reports the Central Bank of Russia website. However, the Soviet government controlled all prices and set an official exchange rate. Soviet individuals could not legally buy and own foreign currency. These controls created shortages, surpluses, and black markets, since supply of many goods was not equal to demand. Zhirinovsky himself repeatedly criticized the Soviet economy, so it will not re-emerge, even if he wins and conducts redenomination.

Chances and prospects

Preliminary studies show that Zhirinovsky, like other Duma opposition candidates, will receive much fewer votes than Putin. A survey of 1,600 respondents, 18 years and older, conducted in 137 inhabited localities in 48 regions, showed that 61% of all respondents are willing to vote for Vladimir Putin, but only 8% are willing to vote for Vladimir Zhirinovsky, who ranked second in their survey, reports Levada Center, the non-governmental research agency that conducted the study.

Though BBC describes Zhirinovsky as “a showman of Russian politics”, one should not underestimate the influence of the LDPR. The ruling “Unified Russia” party may use some of their ideas to strengthen its popularity. Both the LDPR and the ruling party emphasize traditional values. Both parties argue for a strong military and participation in armed conflicts to protect alleged interests of the country. Zhirinovsky is a hardliner, but the current geopolitical tensions have narrowed the gap between the two parties, and their economic programs may also become similar over time.

The actual election results may be surprising. On December 22, Gennady Zyuganov, leader of the Communist Party of the Russian Federation (CPRF), whose rating by Levada Center in the above-mentioned survey was estimated at 6%, nominated Pavel Grudinin, CEO of JSC “Sovkhoz named after Lenin”, to become their candidate, reports Interfax. This agricultural corporation positions its practices as being employee-friendly: instead of paying dividends, its shareholders spend their equity on salaries, modernization, and social projects, reports the website of the organization. If poorer voters believe that the government under Grudinin will treat them as well as he treats his employees, they may be more likely to vote for him. On the other hand, Zyuganov had received far more exposure in the media, so Zhirinovsky may take away some of the votes of the CPRF’s electorate.


Conclusion

Relatively low inflation in Russia and retained rouble credibilty imply that redenominating now is monkey business. Nevertheless, Zhirinovsky’s promise may have some political appeal. Though Putin is the sure winner of the election, there may be black swans in the distribution of votes of the losing candidates.

Notes

The redenomination of 1998 cost the government 556 million roubles, including 510 million roubles on issuing bills, 8.5 million on issuing coins, and 37.6 million on promotion, reports the Kommersant newspaper.


References

BBC. Profiles of Russia’s 2012 presidential election candidates. http://www.bbc.com/news/world-europe-16750990. 2012.

Central Bank of Russia. Official Exchange Rates of the State Bank of the USSR. http://www.cbr.ru/currency_base/GosBankCurs.aspx?C_month=12&C_year=2017&mode=1. 2017.

Central Bank of Russia. Assets of organizations, bank deposits (accounts), and other attracted funds of legal entities and individuals in roubles, foreign currency and precious metals. http://www.cbr.ru/statistics/UDStat.aspx?TblID=302-21. 2017.

Federal Service of Government Statistics. Average nominal accrued salary of employees for all organizations in the economy of the Russian Federation in 1991-2017. http://www.gks.ru/free_doc/new_site/population/trud/sr-zarplata/t1.docx. 2017.

Index Mundi. Crude oil (petroleum); Dated Brent Monthly Price - US Dollars per Barrel. http://www.indexmundi.com/commodities/?commodity=crude-oil-brent&months=60. 2017.

Interfax. The Communist Party of the Russian Federation agreed to nominate Grudinin to be candidate for the President of the RF. http://www.interfax.ru/russia/593077. 2017.

International Monetary Fund. World Economic Outlook Database. https://www.imf.org/external/pubs/ft/weo/2017/02/weodata/weoselser.aspx?c=922&t=1. 2017.

JSC “Sovkhoz named after Lenin.” The director of the Sovkhoz was sued for words that he did not say. http://sovhozlenina.ru/директора-совхоза-судили-за-слова-кот/. 2017.

Kommersant. How much does the redenomination cost? https://www.kommersant.ru/doc/21081. 1997.