Crimea Established as a Two-currency Nation

July 7, 2014         By: Helen Wallis

The increasing hostilities in the Crimean region of the Ukraine have received much media attention in recent weeks with Russia increasingly defiant about the opposition to its occupation of the peninsula from western countries.

With President Putin now formally claiming Crimea as an annex of Russia and forcibly cutting the country’s previous ties with Ukraine, a move which many nations are describing as illegal, the small  country is now in a state of flux.

This has not been helped by Russia’s latest move: the introduction of the ruble as the new currency of choice.

 

Understanding the crisis

With such a bold and unrepentant act of claiming possession from Russia, it is hard to quite understand the semantics of the situation and the sequence of events.

The Crimean Peninsula is also an island, lying alone and stretching out into the Black Sea. It is separated from the rest of Ukraine both geographically as well as politically and historically. There is a strip of land which creeps towards Russia, where the Russian government now reportedly plans on building a bridge across the water to reach.

Like the Ukraine, Crimea was part of the Soviet Union until it broke up in 1991. It was previously absorbed into the empire in 1921, at which time it was primarily resided in by Muslim Tatars. However, Stalin ordered the mass export of much of the native population of Tatars after World War II as he believed they had collaborated with the Nazis. This allowed Russians to fill the land.

In 1954, Crimea was handed to Ukraine, a gesture made by Soviet Union leader Nikita Khrushchev but it wasn’t until 1991 when the union was broken apart that this become relevant.

As a result of the ownership, Crimea ending up officially part of Ukraine as it achieved its independence from the Soviet Union. Nevertheless, around 60% of its population described themselves as Russians, a key fact in Putin’s move to claim the country as their own.

 

Why is it so important?

Having understood the history of Ukraine, Crimea and Russia it’s clear to see why there is a conflict of moral ownership but what is it about the small nation, which is barely the size of Belgium that makes it such a must-have commodity?

Crimea offers a temperate climate and as a result of this is popular with tourists. The small area of land contributes 3% to Ukraine’s GDP with services, farming and iron ore mining making up a large part of this. Around 6.6% of Ukraine’s grain exports – 1.6 million tons – have come from Crimea.

But whilst its tourism economy and thriving farming industry are highly desirable, Russia has its eye on a much greater prize: access to the Black Sea.

Since handing over the peninsula to Ukraine, Russia has kept thousands of navy personnel on the Russian Black Sea Fleet on the waters at the southern tip of Crimea. The port of Sevastopol acts as home for the fleet and is the base from which the Russian forces can access the waters of the Mediterranean. Tactically then, having access to these waters is vital.

In 2009, Russia was given a nasty shock when Ukraine President Viktor Yuschenko, known for being pro alliance with the west, warned that they would have to leave the port by 2017 at the latest.  This decision was later overturned by a pro-Russian Ukrainian President Viktor Yanukovych who negotiated an extension to the Russian lease until 2042 in return for a healthy discount on the Russian gas supplies.

However with another pro-western government once again in charge in Ukraine, Russia fears that once again it could be on a dodgy footing hence the move to reclaim the peninsula as its own land and people.

 

Hostilities

Russia’s increasingly aggressive stance culminated in approval for Putin to sanction military force in the region, a move which shortly resulted in the appearance of two Russian warships which had been rapidly relocated from their Baltic Fleet. This violated the terms of the lease agreement between Russia and Ukraine.

Putin believes his actions have been validated by the results of a referendum which was held briefly before he reclaimed the territory as Russian; 97% of respondents said they wanted to return to Russian rule. Yet despite this result, the turnout was poor and somewhat limited to those who were pro-Russian.

Putin moved swiftly and decisively; in what the rest of the world saw as one of the most aggressive actions in recent history, the Russian President sent military troops into Crimea and signed a treaty, and in doing so officially declared the country as ‘returning home’.

So far Putin has refuted claims that he will now try to claim parts of the Ukraine, particularly eastern regions where there is a lot of support for Russia compared to western alliances.

 

Dual currency use

Following the signing of the treaty, Russia has not delayed in putting their stamp on the tiny nation, despite ongoing elections being held in Ukraine.

Until the Russian invasion of Crimea, the peninsula had been using the hryvnia, the Ukrainian currency but since Monday 24th March, residents can now use the ruble too, the Russian currency.

Using Twitter to spread the message, the pro-Russian Crimean Prime Minister Sergiy Aksyonov announced that ruble could now officially be used in the nation as a method of currency. He went on to say that although the hyvnia is currently still recognised as a currency, after 16 January 2016 it would have no further value in the country, being removed as a form of legal tender.

All of the official channels in Russian were churning out the pro-ruble news, declaring that the Russian currency could now be used in Crimea.

Back in Crimea, the deputy Prime Minister Rustam Temirgaliev announced that with immediate effect all pensions in the nations would be paid in ruble rather than the traditional hyrvnia. Around 300 million ruble (six million euros) have been set aside for the payments,

Following on from the law, which formally annexes Crimea to Russia, the ruble isn’t just a currency alternative, it’s been installed as the official currency of the territory,

However, it appears that not everyone is as delighted with the idea of operating a two-currency regime.

Despite the announcement, banks and shops were continuing to trade almost exclusively in their previous currency, the hryvnia, and ignoring the appearance of the ruble.

Several banks said they had received no notification about the official switch in currency and until they did so would carry on trading using the hryvnia.

In the Post Office branches in Crimea, there was a slightly different approach. They at least were aware that pensions would now have to paid in rubles but had received no instructions as to how this would take place or when.

Many shopkeepers complained that not only had they not been informed officially, they were also unprepared for the sudden appearance of the ruble, with tills and other machinery not equipped to recognize another currency.

One hotel admitted it was accepting payment in ruble, but was continuing to give out change in hryvnia.

A municipality spokesman denied there was any confusion over the introduction of the second currency, declaring that ‘for the time being’ all purchases would be denominated in both currencies and could be paid for in either.

 

Weakening currency

The continued volatility of the region overall and political instability has weighed heavily on the hryvnia.

Despite a forthcoming IMF package, the hryvnia has lost 23% this year so far, making it the worst performing currency in the world.

Underpinning the move lower was the persistent rumors that Ukraine will be forced to allow its currency to devalue as part of the bailout package they received from the IMF.

The currency has been plunging of its own according to reports from Bloomberg although losses pared after Russia confirmed it would not seek to annex any further parts of Russia to swell its own borders.

The Ukrainian currency has already hit a record low, weakening against the dollar to less than 10 for the first time in its history. This was caused by the introduction of a flexible foreign exchange rate to replace the existing method of simply pegging directly to the dollar.

Its counterpart in Crimea, the Russian ruble was barely faring any better with the Russian economy overall still in an extremely fragile state.

Inflation in the country is currently painful, with the Economy Ministry predicting that it will top 7 per cent by the end of March, sending the value of the ruble in real terms rapidly downwards.

But despite the ruble hitting an all-time low against the dollar earlier in the month, it has enjoyed a mini revival after being installed as the new official currency of the Crimea region. However experts predict that this upward trend will not last for the ruble, and with investors pulling out of the currency the forecast seems a certainty to hold.

Editors note: The research for this article came via Currency Index.