Some time ago authorities of so-called LPR said that “republic” was going to use Rubles for all transactions. Informator.lg.ua tried to find out real reasons and possible consequences of switching to Russian currency and details of the economics of “the young republic”

Ruble comes in, Hryvnia goes out

The leaders of terrorists of LPR said several times that the amount of UAH banknotes goes down dramatically on the territory that they control and according to them that happens because of economic blockade from Ukrainian side.

Several months ago the leaders of insurgents were saying that gradually during 6 months or so UAH will be replaced by Ruble that will become base currency in all payments on the territory of the “republic”. But let’s talk about everything step by step.

At the beginning of February – March2015 they had to declare “multi-currency” system. Because of economic blockade from the side of Ukraine the cash in UAH was “washing out” of “republics”. At the same time economics ties with Russia helped to increase the amount of Rubles on the territories controlled by insurgents.

Economics ties between LPR/DPR and the rest of the territory of Ukraine get weaken. UAH was not coming from State Treasury for budget payment, Ukrainian banks also left the territory and all that created «vacuum» of means of payment.

As a result of financial-economic blockade from the side of Ukraine most of the goods on occupied territories get delivered from Russia. So internal and external money circulation in LPR switched to Ruble zone.

How “republics” fill their budget?

When they start to talk about social responsibilities like payments of pensions and salaries the leaders of “republics” mostly use common phrases such as «budget revenue», «managed to accumulate the necessary funds» and so on. We can only guess where they really get the money from to fill budgets of LPR and DPR. More likely the major source of incoming cash flow in “republics” is trade with Russia, where they sell coal and other products produced by the companies that managed to survive.

The leader of DPR Aleksandr Zakharchenko told about coal sold to Russia in one of his interviews.

Informator.lg.ua also wrote before that starting from Spring 2015 Russian Federation began to subsidize “budgets of republics” directly, giving money for social payments.

Another possible “income” of “young republics” particularly in LPR is looting of industrial infrastructure of the region. Factories get cut and sold as scrap metal, equipment and companies get moved to the territory of Russian Federation. Obviously “authorities” of the “republics” get some income from “nationalized” production companies.

What is the basis of LPR economics?

As for filling the “budget” by taxes… that version can’t be taken seriously. The profits of private and “government” companies located on occupied territories are very little. The cost price of any product manufactured under conditions of economic blockade, disruption of supplies, very limited markets will be always much higher than in neighbored regions. At the same time some companies that are located on occupied territories continue to pay taxes to Ukrainian budget and that means they are under double tax pressure. This also influences the end price of a product.

This is not totally related to production of bread, alcohol and “essential goods”. But you can’t fill the budget of the “republic” selling social bread and “people’s” vodka.

Because of the economic “lull”, high level of unemployment and bad social situation in occupied territories the local population is looking to make anything for living even working unofficially.

Local resident who sells auto parts calls Lugansk “a city of hucksters”. He says that in the last 6 months many of his friends started to do some kind of strange business in order to survive, some grow hamsters and guinea pigs, some grow oyster mushrooms, some started knitting hats and sweaters and so on.

Flea markets become more and more popular in the “capital” of LPR, you can buy much more things there now.

Maxim says that he’s got a feeling that he saw this already long time ago… after some pause he adds that this situation is similar to 90-ies when there were not enough jobs and money for everybody and people did what they could to survive.

“Militia” and Russian mercenaries are also important for economics of occupied territories, there are tens of thousands of people of such kind there. They get high “salary” according to local standards. So illegal armed groups have certain social value and they are one of the factors of the growth of economic activity.

Another source of income for local population are pensions and other social payments that they registered on Ukraine controlled territory.

It’s not a secret that many pensioners, disabled and other people of occupied territories registered their social payments on Ukraine controlled territories and came back to “republics” after that. Luckily the Ministry of Social Policy doesn’t care about that. That money helped many retired people who stayed on occupied territories to survive.

“Republics” media say about rapid development of their “countries”, but there is economic catastrophe coming behind that curtain of lie and it will take decades to overcome its effects.

Political logic

Besides political reasons that pushed insurgents to switch to Ruble there is also political component in that decision.

The leaders of terrorists were saying that switching to Ruble symbolizes that they get closer to Russia and that’s another stage of economic integration with “Big Brother”.

Six months ago the process of switching to Rubble as base currency looked unrealistic because of several reasons. Russian Gazeta.ru was saying that Russian Federation authorities didn’t want to get closer to financial-economic integration with “unrecognized republics”.

Every part of Russian Federation has branches of Russian Central Bank that issues Russian national currency. The staff of those branches support and estimate the amount of cash needed for economy.

In order to switch to Ruble LPR would need to have a branch of Russian Central Bank. But such decision would have political effect as that would be direct economic intervention.

Looking at the current situation Russian authorities decided to approve transition of LPR economy to Rube zone. At the same time in order to control the amount of cash they also decided to keep
“multi-currency” system in occupied territories. RussianRublebecamebase, majorcurrencyintherepublics.

Press secretary of Vladimir Putin Dmitry Peskov reacted on that immediately and it’s obvious that decision was coordinated at the highest level.

Besides standard phrases that LPR had to switch to Ruble because of economic blockade he said that Russian Ruble is still a good currency that can be trusted.

Similar thing was told by the “Minister of Finance of LPR” Manuylov during his interview to local separatist TV channel “Lugansk24”. He said that switching to Ruble will help to secure economy of “young republic” as it’s more stable than devaluating Hryvnia.

This sounds strange as in the last year Russian Ruble collapsed twice already following oil prices. Obviously Peskov and Manuylov got optimistic because Ruble became stronger in the last week. But that doesn’t cancel the fact that Russian Ruble went down almost 100% compared to USD.

Russian Ruble exchange rate to USD from September 2014 to September 2015

A lot of financial analytics who predicted economic crisis of 2008, like Stepan Demura, think that there is no base for optimism. There are not much reserves in Central Bank that they can burn to stabilize the exchange rate, changing the key interest rate has never been effective mechanism to make Ruble stronger. The volume of foreign currency earnings of Russian Federation is going down because of the oil prices, Russian economy gets deeper in system crisis.

So all those talks about how stable and reliable the Ruble don’t mean anything. Everybody understands that the occupant authorities just had no alternative.

What people should expect?

Starting from September 1 Russian Ruble is the base currency in payments on the territory of LPR

Recently they had fixed exchange rate on the territory of republic of Ruble to Hryvnia and that was 1:2, from now on the exchange rate is floating and it is about 2.6 Rubles for 1 Hryvnia.

At the same time all prices in the “republic”, utilities and other services are calculated based on fixed rate 1:2.

Floating exchange rate at exchange office allows people who have cash in Hryvnia to change it into Rubles at much better rate. Probably this way authorities of the “republic” are trying to get Hryvnia out of the cash flow.

On another had social payments in the republic are in Rubles for the last few months already.

In spring when they started to give money to pensioners of the “republic” after 8 months “break” and pay salaries to government workers, those payments were converted into Rubles based on 1:2. But the real exchange rate at that moment was 1:2.4. Obviously they did that in order to save money on retired people.

At the same time some companies in LPR continued to give salaries in Hryvnia. Now the salaries should be calculated based on 1:2 exchange rate, basically they are going to rob local population.

If the prices of products that are brought to LPR from Russia were based on real exchange rate and not on 1:2, those who had Hryvnia would be able to buy much more.

Russian Ruble continues to devaluate and this can cause another increase in prices on the territory of “republics”

It doesn’t look like LPR authorities are going to index salaries and pensions for local people. So whatever terrorist claim local people shouldn’t expect that the quality of their life will increase after switching to Russian currency.

Aleksey Chernov for Informator.lg.ua