Does Abkhazia need a currency of its own?

Image removed.Photo © "Liberali"

After Russia’s recognition of Abkhazia as an independent state, a number of issues emerged on the agenda of the country which should be solved step by step.

These include the question of a national Abkhazian currency. For a newly born state, which is making first independent steps and which has been recognized by only a handful of countries, this is of course not the most important issue. However, there are economists who seriously debate the matter.

The intensification of integration processes, the globalization of the world economy and frequent financial and economic crisis require countries to seek for new ways and mechanisms for securing their macroeconomic stability.

One such mechanism is to reject the national currency in favor of a supranational currency such as the Euro or an even more sustainable one – the Dollar.

The majority of the countries that integrate in the world economy face situations when the cost of having a national currency is higher than the benefits a national currency brings.

However, in such a small and, more importantly, young country as Abkhazia, many people view the national currency as a must-have attribute of an independent state.

There are many people in Abkhazia who think that together with the independence the country should have gotten its own money just like its own flag, anthem and other state attributes.

Modern-day Abkhazia which uses Russian Ruble as an official means of payment belongs to the countries that carry out the policy of full dollarization.

The export Batal Baratelia thinks that rejecting a national currency results in the loss of income from the currency emission and inflation tax. The government also loses an important tool for regulating the economy which is a monetary and credit policy. However, according to him, it would be wrong to think that the use of the Russian Ruble has a negative effect on the Abkhazian economy. 

“It is clear that the introduction of a national currency would increase the transaction costs for services and exchange operations. Considering that the Abkhazian economy largely depends on exports, this factor would become a reason for a pressure on a national currency,” he thinks.

But this is not the most important thing. The national economy practically does not depend on the monetary policy of the country. For example, interest rates or inflation have no effect on the economic processes in Abkhazia. What play a major role instead is the agricultural harvest and the flow of tourists during the summer season. The former depends on environment conditions while the latter is rather related to economic and political factors than to the monetary policy carried out by the Abkhazian government.

Thus, the existence of a national emission centre and a national currency would probably not create an effective macroeconomic regulatory tool which is the monetary and credit policy.

Another advantage of using the Russian Ruble is that the Abkhazian government does not have to care about price stabilization, fight against inflation, reduction of interest rates and cheap financial resources. Yet another advantage is that it is impossible to cover the state budget deficit by inflation. The government does not have to regulate payment balance, currency exchange rates and protection of the currency from speculators.

The major argument of the economist Andrey Bgashba in favor of an Abkhazian currency is that the cash which circulates in the country does not stay there but go to Russia. “It is a very simple chain: I get my salary and buy a product in a shop. In this way all my money goes to one entrepreneur and then it goes where? To Russia. Every month the National Bank of Abkhazia allocates a certain amount of cash to pay wages,” the expert says.

According to the National Bank of Abkhazia, the cash turnover in the country in 2009 made 11 billion Rubles. Almost all of it has left Abkhazia. Bgashba says that were this money in national currency, it would have stayed in the country.

Another argument in favor of a national currency is that its existence makes the fight against a shadow economy more effective. According to Bgashba, it would not be a national currency in its classic sense (backed by gold reserves and other assets) but a certain surrogate of a national currency which would be used for cash transactions within the country. 

According to the economist, if Abkhazia rejects the Russian Ruble and decides to introduce a national currency, it would have to solve two major problems. The first will be legal: the danger of money falsification and the second, a political one: the difficulty to explain this decision to Russia.

For the time being the National Bank of Abkhazia does not contemplate introducing a national currency. Instead, it chose a different way to stabilize the poor condition of the national financial system: namely, it decided to introduce the system of electronic payments, which does not exist in Abkhazia at the moment.

The terminology used in the article belongs to the author only and not to “The Liberali”.

The article has been prepared with the support of Heinrich Boell Foundation. The views and opinions expressed in the publication do not necessarily reflect those of Heinrich Boell Foundation.