#soviet ruble

Today another sovereign currency passes into history -  

The Second Lithuanian litas (1993-2015): Much like its Baltic neighbor Latvia, Lithuania introduced an intermediate currency to deal with immediate monetary issues following its secession from the Soviet Union. Although an independent currency was both conceived and prepared for prior to independence, Lithuania felt it needed another medium to ease transition as the country’s trade remained heavily reliant on the Soviet Union. After a mangled effort to simultaneously use both Soviet rubles and a temporary currency called the talonas (which acted at first as a coupon, then an independent currency on par value with the ruble), Lithuania became the last Baltic republic to abandon the ruble on October 1, 1992 and retained the reformed talonas. Although inflation in Lithuania remained lower than that in Russia, it still stood at eye-watering 409% in 1993. In addition, the Latvian people were reluctant to utilize the talonas banknotes, which were printed on low quality paper (an issue that was also delaying the introduction of the new litas as well). This led to people preferring to carry U.S. dollars instead of the volatile talonas. Amidst a crisis of economic confidence and acting on long-delayed plans to circulate a more permanent currency, the litas was finally introduced at a rate of 1 litas = 100 talonas on June 25, 1993. 

Named after the first Lithuanian litas, which was circulated by the first Lithuanian republic between 1922 and 1941, the new currency had a rocky start. The government’s attempt to show confidence by exchanging unlimited amounts of talonai to the new tender without having to show the source of the income led to massive money laundering by criminal elements. Indeed, the litas continued to be plagued by issues such as counterfeiting that hurt its credibility.

 Although the litas fell in value from 4.5 litai/USD to 4 litai/USD by August 1993 (when the litas became the sole legal tender), it soon stabilized around 3.9 litai/USD. To further instill confidence in the new monetary regime and following the recommendation of the IMF, Lithuania pegged its currency at 4 litai/USD between April 1, 1994 and February 1, 2002. 

On February 2, 2002, the litas changed its peg to the European common currency at a rate of 3.4528 litai/euro. Officially entering the EU Exchange Rate Mechanism in 2004, Lithuania pushed to meet the convergence criteria for entry into the Eurozone, working to curb inflation and close the budget deficit. As a result of the sustained discipline and overcoming the shock of the global financial crisis, Lithuania will become the last Baltic republic to join the euro on January 1, 2015.

Of course with the ongoing recession and deflation (not to mention the revival of Grexit threat), there are questions on what Lithuania will exactly gain from joining the besieged monetary union.

The Economist presented the following reasons for Lithuania’s entry:

First, Lithuania is required to join – all members of the European Union, with the exception of Denmark and Great Britain, are required to adopt the single currency.

Second, the euro adoption will signal greater monetary stability to investors and reduce the cost of borrowing (a 0.8 percentage-point fall in the government’s average interest rate, according to the Bank of Lithuania). Indeed, Lithuania sold 1 billion euros ($1.24 billion) of 12-year bonds, its longest-ever maturity, at record-low yields of 100 basis points above the benchmark swap rate on October 22.

Third, closer integration with the European Union, many Lithuanians believe, will protect the country from Russian aggression. Moreover, it reduces the Russian leverage as Moscow has issued sanctions against Lithuanian exports to Russia, approximately 30% of the Baltic republic’s total exports. Joining the Eurozone will allow Lithuania bolster trade relations within the economic community. Indeed, the central bank expects 5-10% growth in foreign trade and a 2% rise in real GDP as a result of joining the single currency.

Although public opinion remains largely in favor of joining the euro (63%), these are certainly hard times for the Eurozone and Lithuania is shackling itself to the collective economic fate of the common market. A bold move - which hopefully will be worthy of the country finally letting go of its hard-earned, hard-labored sovereign currency.