Tuesday, January 27, 2009

Not the Kool-Aid Man: U.E. Is Pronounced Oo Yea

NEW YORK, New York -- As the Legionnaire has noted, this blog was formed to offer some "straight talk" about Russia. However, we've gone quite astray almost from the very beginning.

First of all, the massive, ridiculous and expected crash of the US economy and global financial system made events in the US arguably more relevant, urgent and interesting than goings-on in Russia.

Secondly, the huge blow-up of the Russian economy means that the people we had for years wanted to "go mav" on as they talked about the glamour and wonders of the "resurgent Russia" -- reporters at leading English-language papers -- stopped talking nonsense and quickly came to realize that the foundations of the Russian economy lay on oil, cell-phone ring tones and (only in very recent times) fickle sales of Heineken, TopShop clothing and black BMWs and Audis for sketchy bureaucrats.

That's, like, so 2006

But it is not without some sense of restoration that we try to regain focus every now and then. Today's Moscow dispatch comes from an article in the English-language Moscow Times.

The paper reports that the recent dramatic fall in the value of the ruble against the dollar and euro has brought a return to prices in a magical, mysterious and purely Russian price measurement called u.e. (pronounced "oo yea"), the acronym for uslovnaya edinitsa (условная единица, у.е.), which in English translates into "conditional unit."

Through the 1990s and especially after the devaluation of the ruble in 1998 following Russia's default on loans from the "Paris Club" of debtor nations coordinated by the International Monetary Fund, items from electronics to apartments to food were sold in u.e. in Russia. This roughly meant dollars. However -- and here's where it gets weird -- u.e. were not a separate currency. They were a way of pricing things in rubles independently of the value of the ruble, as it were. Because of the instability of the ruble, retailers and other vendors would set a dollar price that represented what they paid for goods. One week a dollar may equal 30 rubles and the next it may jump to 35 rubles. But by pricing things in u.e., a vendor was guaranteed more stable revenues vis-a-vis the costs they paid for their goods.

So if I paid 2 u.e. for a meal of borshch and a salami buterbrod, I may pony up 60 rubles or 70 rubles, depending on the week I ate.

Now, if you're thinking, "This sounds totally open to abuse," you're absolutely right -- this is Russia, after all. Restaurants, realtors, auto dealers all reserved the "right" to determine for themselves how many rubles an u.e. was on a given day. If the street rate (the Central Bank rate is always disregarded) is 30 rubles/$1, then one grocer may set it to 35 rubles/$1, while a passport photo salon may have a rate of 38 rubles/$1, giving themselves a nice little extra profit. Even big companies like the state-owned airline, Aeroflot, would constantly rejigger the value of u.e. seemingly to scam people.

Yours for $70 ... or ... thereabouts ...

In recent years, as Russia flooded with petrodollars and the English-language press flooded with poorly reported stories egged on by editors itching to tell of the glamour and new money of Moscow (or Dubai or Shanghai), the u.e. faded away. The ruble strengthened and stabilized, and Russia paid off its Paris Club debts ahead of schedule, amassing nearly $600 billion in foreign reserves by August 2008, third-highest in the world (after China and Japan). From 2002 to 2008, first markets and retailers, then restaurants, and finally landlords did away with u.e.

But with the ruble shedding over 30% of its value against the dollar in the past 6 months, slumping from 23 rubles to the dollar to 33 rubles to the dollar, u.e. are making a comeback.

For months, Russians have frantically bought dollars as the ruble sinks to its lowest values in over a decade, and analysts see further devaluation ahead. As goes without saying, the devaluation is having a huge effect on people's lives: Because the vast majority of Russia's pharmaceuticals are imported (take heed, America), prices for drugs in pharmacies across the country increased 11% in the first three weeks of the year.

And then there's the u.e. For years, the price measurement was considered an unpatriotic embarrassment by Kremlin officials all the way up to (and probably especially by) then-President Vladimir Putin, who in 2006 railed against businesses that used it. But as is often the case, the market roared louder than the president, and a strong ruble muscled out the u.e. where nationalist politicians had previously failed.

Today, Russia's politicians seem almost to be giving up. Russia spent 1/3 of its foreign reserves propping up the ruble at the end of 2008, but has allowed it to slide fairly quickly since last month. After allegedly banning state media from using the word "crisis" in relation to the Russian economy last fall, the word is now ubiquitous, and no longer inevitably preceded by "the American" or followed by "of the West."

From big developers like PIK to landlords, the u.e. has apparently made a comeback after a fairly lengthy absence (contrary to the greenhorn Moscow Times reporter's assertion, the u.e. hasn't been used by most landlords, cell-phone providers or retailers since late 2005 or 2006). Like foreign reserves, Russia has built up plenty of corruption in recent years. With the return of the u.e., that is one thing whose reserves are not likely to be spent if the ruble continues its downward trajectory.

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