Payments and Finance Problems in the Commonwealth of Independent States

April 1996 Solving payments problems that have recently constrained interstate trade among member countries of the Commonwealth of Independent States (CIS) requires stabilization measures that improve the prospects of currency convertibility among CIS countries and stronger institutional arrangements, to permit payments and settlements through correspondent bank accounts. Payments problems constrained interstate trade among the CIS countries in 1992 - 95, especially during the prolonged demise of the ruble zone. Two kinds of solution should be sought: more effective stabilization measures to improve the prospects of currency convertibility among CIS countries, and strengthening of institutional arrangements to permit payments and settlements through correspondent bank accounts. Strengthening institutions will require not only strengthening commercial banks but liberalizing foreign exchange markets and promoting the use of letters of credit and other mechanisms to increase the security of trade transactions. A multilateral clearing arrangement operated among central banks would have been a useful alternative to the chaotic payments prevailing earlier, but such arrangements are no longer needed as considerable progress has been made toward convertibility. Nor is a payments union desirable. Trade deficits are likely to persist in such countries as Belarus and Ukraine. Surplus countries such as Russia and Turkmenistan must develop transparent means of trade financing that take into account the recipient countries' ability to pay. External financing will remain important for practically all CIS countries. The best way to mobilize private financing will be to establish macroeconomic stability and stable, transparent rules on private capital inflows. Improving the flow of public resources requires improving countries' capacity to quickly absorb the large amounts already committed. Donors need to expedite procurement and other procedures and recipient countries must address governance problems and institutional weaknesses that delay disbursements. Certain smaller CIS countries face significant debt servicing problems and often the creditors are other CIS countries that themselves need additional financing. The smaller countries need debt relief on concessional terms, possible only if external assistance allows local creditors to offer such relief. This paper --- a product of the Office of the Director, Europe and Central Asia, Country Department III --- was prepared as part of ongoing research on trade and payments issues in the former Soviet Union.