Planet Money - When bricks were rubles

Episode Date: April 1, 2022

For a brief, strange period after the U.S.S.R. collapsed, "real" money was less valuable than tradeable objects like bricks or towels. We look back at the Russian barter economy and we see the nature of money and value underneath all currency. | Subscribe to our weekly newsletter here.Learn more about sponsor message choices: podcastchoices.com/adchoicesNPR Privacy Policy

This is Planet Money from NPR. Within just the last month, Russia became the most sanctioned nation in the world. The U.S. and Europe have now imposed thousands of individual sanctions targeting everything from Russia's banks to its luxury goods to its vodka even. But as we've talked about here before, the real economic lifeblood of Russia isn't any of that stuff. A huge chunk of Russia's economy is oil, natural gas, and minerals. And countries are kind of slowly also starting to sanction that stuff. You know, the thing about sanctions is that they force us to look at what another country's economy really is. And I think for a lot of us, this

moment was a reminder that the Russian economy is a lot less like the diversified economy of the United States and a lot more like the resource economy of a country like Saudi Arabia. Hello and welcome to Planet Money. I'm Kenny Malone. And I'm Dave Blanchard. This is not the first time the world has been forced to look a little closer at the realities of the Russian economy. Today on the show, we tell the story of the last big time that we had to look a little closer. And it revealed one of the strangest 10-year stretches in modern monetary history. When the Soviet Union was at its height in the 20th century, it was this big block of states with a population that was bigger than the U.S., had the second largest economy in the world,

but it was all behind the famous Iron Curtain. And so just how exactly the USSR's economy worked was a bit of a mystery. And I personally find it useful to think of the USSR economy at that point in time as like one giant corporation that's made up of a bunch of subsidiaries that, you know, make Soviet cars or shoot cosmonauts into space or run nuclear power plants. But which parts of the economy were really generating the value and which businesses seemed successful but were really being propped up? Well, that kind of stuff was tough to exactly know. But then in the early 90s, the USSR collapsed and the West had this opportunity to get a clearer picture of what exactly had been going on behind the Iron Curtain.

One person who was sent over was Barry Ickes. I was consulting for the World Bank at the time on a study on enterprises. Enterprises, as in businesses. Barry is now head of Penn State's economics department. But in the early 90s, he was a young professor. He'd studied the USSR. In the early 90s, he was a young professor. He'd studied the USSR.

And when it started to fall, the World Bank sent Barry over to meet with all kinds of former Soviet businesses to understand how they were handling the transition from communism to capitalism. I went to visit one enterprise in 1990, late 1992. This was a company, an enterprise that was in the shoe sector. They produced the soles of shoes. I mean, everything was that was in the shoe sector. They produced the soles of shoes. I mean, everything was so specialized in the Soviet Union. Soles of shoes, maybe the upper part of shoes. Barry can't remember exactly, but shoes, a shoe factory. So can you just describe, you know, when you came there, can you tell us a little bit about his office, what the office looked like? Well, it was a former Soviet enterprise.

So while Soviet enterprise director's office looks the same, you know, you have like bulletin boards with famous employees of the enterprise. You know, there'd be, you know, a picture of Lenin somewhere because they hadn't gotten rid of it yet. So there's Barry, shoe factory, 1992, maybe standing under a picture of V.I. Lennon. And he starts talking to the head of the factory. And he pulls me to the window and he points across the yard. And across the yard is this like a half a city block. And the city block is just a pile of bricks. He says, that's all my savings.

You know, this is what I've done, you know, because bricks, people need bricks. I can pay for it in bricks. Way more valuable than a stack of rubles in a vault somewhere. Yes. Yes. More valuable than the ruble, the Soviet Union's currency, because when the USSR collapsed, so did its ruble, to the point that apparently bricks had become a preferable kind of money in 1992. And this bricks as money thing, Barry says it was just one of the many strange ways the post-Soviet economy was behaving. He gave us this other example. There was an enterprise that produced industrial ovens that were bronze. And this enterprise was a gold star enterprise. And Gorbachev went there and gave the enterprise, because it was earning hard currency. What a great, efficient Soviet enterprise.

Behind the Iron Curtain, this bronze oven company looked great. I mean, they were selling these ovens out of the USSR. They were making money. Yeah, it appeared that maybe one of the things the USSR was good at was making bronze industrial ovens. What turned out is they were exporting these things to Germany. Germany was melting the ovens down and just selling the bronze. OK, so that is an example of negative value added. Right.

Everything else that went into the industrial oven was worthless. Right. Because the value of the bronze was worth more than the price they got for the oven. In other words, this little business was functionally a bronze exporter. And frankly, it could have done better just exporting the bronze and not doing a lot of work to make it into an oven. But it is an example of this disconnect between the USSR and the rest of the world and all of these strange economic distortions happening behind the Iron Curtain that people like Barry were now getting to see. Another example, Barry says,

was this Soviet company that made world-renowned optical lenses, like for medical equipment, cameras, weapons. And people thought, okay, now there's a Soviet business that's going to survive in a market economy. And they were good lenses, but when people got a closer look, it turned out that they were being made for way more money than anyone would pay for them in a global marketplace. And so what people like Barry were learning was that, yes, the USSR did make stuff, even high-tech stuff, but these industries were not ready to compete with companies around the world. We liken this to the circus mirror effect. You know, you go look at yourself in a circus mirror and you look like Arnold Schwarzenegger, you know? Yeah. That's a Soviet economy. Then you look away at a real mirror.

You say, oh my God, look at me. I'm like this out of shape nebbish. That is the actual economy. That's what happened. What was really happening in the USSR, what the economy actually looked like, was that there were these few very successful industries that we know about. Natural gas, oil, and mining. You know, mining for things like bronze that could go into ovens. for things like bronze that could go into ovens. And they were subsidizing all of the other fun, exciting tech things,

but that were not very successful, the nebushi industries. So when the Soviet Union collapses, now all of those not successful industries are competing in a market and they need to turn a profit and things just kind of freeze up. If no one wants to buy your nice but ridiculously expensive camera lenses, then all of a sudden your company doesn't have a cash flow. And lots of formerly Soviet companies suddenly had no money and no way to pay each other. Which brings us back to that shoe factory and that giant pile of bricks that Barry saw in 1992.

So where did he get the bricks? I think somebody couldn't pay for him in money and he got bricks instead. So they're doing that instead of using the ruble for some reason. Why are, you know, just everyday businesses not using the ruble at this point? In the early period,

the difficulties is that they had no revenue. Firms just didn't have enough revenues. They weren't making money. They weren't earning rubles. Yes. So some firms just held, you know, bricks as a store of value. Bricks as a store of value.

This is a key idea because in addition to cash flow issues, Russian businesses were also dealing with inflation, but not just like regular inflation, hyper, hyper inflation at this moment. One big reason was because in the Soviet era's planned economy, prices had been controlled. And when those price controls were lifted when the Soviet Union fell, inflation skyrocketed.

In one year in 1992, Russia's inflation was 2,500%. one year in 1992, Russia's inflation was 2,500%. That is like, if you have one ruble and you can buy a dozen eggs, then six months later, you can only afford one egg with your ruble. The ruble was becoming worthless incredibly fast. So what this meant for a Russian business was you'd probably take bricks as payment of rubles because they were a better store of value. take bricks as payment of rubles because they were a better store of value. And so in the early 90s in Russia, Barry says this kind of bartering economy became surprisingly common. Like, let's say that you are that shoe manufacturer. You need to buy some leather for your business.

And instead of paying for the leather with rubles, you just pay with shoes. Now, the leather company has the shoes and the leather company delivers the shoes for something else. I mean, shoes wouldn't be a bad thing to have, right? Right. So shoes, bricks, whatever, these things had become a kind of money, which means that it's worth stepping back for just a second to talk about what money is. Because money is supposed to have these three main characteristics. Number one, it is supposed to be a store of value, something that is worth roughly the same amount day after day. Something like bricks definitely was doing better than the ruble in Russia was at that moment. Second characteristic money, money is supposed to be a unit of account.

Like you can assign a value, you can keep records. And companies apparently did figure out some bricks to leather to shoes conversions. But money characteristic number three, this is maybe the problem for bricks as money. Money should provide an easy means of exchange. Yeah, like maybe companies can haul bricks around to pay each other, but nobody wants to carry a bunch of bricks for money to the grocery store to buy carrots. And in Russia, this was not a hypothetical problem. Can you just introduce yourself? Tell us who you are.

My name is Vladislav Nazemtsev. I'm a professor of economics. My name is Vladislav Nazemtsev. I'm a professor of economics. Vladislav was born in the Soviet Union, and he was in Moscow in the early 1990s when all of this strange money stuff was happening. And he explained to us that sometimes companies would pay their workers in things, in goods. For example, if you are paid in towels, in vodka, in some furniture whatsoever. You can just offer it to your own workers, either for personal consumption or they can sell it. And sure, who doesn't want some towels and some vodka? But it is not practical to schlep boxes of towels to the grocery store, assuming that they would even accept your towels as payment.

And so, Vladislav says, people who had been paid in towels or whatever, then had to find a way to sell those towels. For example, I remember my mother at the time lived in Belarus, and I took my car and went there several times a year. So you have many markets on the side of the road when the people were trying to sell beddings and towers and some other stuff just because they got it as a kind of payment. So you're driving to go visit your mother and along the street you see, what do they look like? Little kiosks or little, just, do people set up a tent? Yeah, they were not small tents.

They were actually places maybe 10 miles from each other, where dozens of tents. Did you ever stop when you were driving and buy anything at any of these places? Yes, yes, sometimes. They were cheap and it was quite common. But for those people who were working at the factory or whatever, and then they had to then also become a retailer to sell their bedding, they had two jobs. There's a lot of inefficiency that gets passed down.

Extremely, extremely. It was a very inefficient economy. Vladislav says there's this idea that in certain situations, good money replaces bad money very easily. Meaning, if there's a form of money that does those three money things better, it's going to naturally and quickly replace the worst money. And in the very early 90s in Russia, you could see this happening in the real world. The ruble had become bad money. Towels and bricks were not perfect, but in some ways, they were better money. After the break, a better-er form of money?

That also reveals the heart of the Russian economy. Hey there, this is Amanda Aronchik, one of the hosts of Planet Money. Two years ago, payments towards student loans were paused. So for an upcoming episode, we're wondering, what have you been doing with that money instead? And how are you preparing for the possibility of paying again? Let us know. You can email us or record a brief voice memo. Please include your name and location.

Our email is, as always, planetmoneyatnpr.org. Thanks. One expert we talked to while researching this story told us that people sometimes refer to Russia as a gas station with an army. Because, of course, Russia produces a lot of oil. with an army. Because, of course, Russia produces a lot of oil. But Russia also has this gigantic quasi-state-owned energy company called Gazprom. It is one of the biggest natural gas producers in the world. And it's this kind of holdover from the Soviet economy. And as the USSR started to open up to the world, Gazprom was one of the few enterprises that could compete globally. It could

sell gas and make real money. Barry Ickes, the economist, the witness to large piles of Soviet bricks, he told us that even though Gazprom got to be this global player, it still needed to be one of Russia's local neighborhood energy companies. And so in the mid-1990s, that meant that Gazprom had to do business with a lot of former Soviet companies that were doing very badly at the time. Just everybody dealt with Gazprom. Gazprom was kind of like the government in some sense. Everybody dealt with Gazprom, and all these enterprises, lots of enterprises, couldn't pay their bills.

So the IOUs developed that way. They're bills. So the IOUs developed that way. IOUs. In the mid to late 90s, IOUs, actual pieces of paper, started to circulate as yet another alternative to rubles. And these IOUs, these were not really something average citizens were dealing with. This was another currency workaround for businesses. Barry gave us an example. So let's say there's this factory that makes machine tools that Gazprom wants. The machine tool enterprise delivers machine tools to Gazprom because Gazprom needs it to build the pipeline. Here's your pipe fittings. We made them for you. Pipe fittings. Gazprom pays them with promissory notes on future natural gas.

Promissory notes. These are the IOUs. They're actually called Vexels in Russia. And so again, you got this machine tool place, still doesn't have cash, but you know what it does have after delivering its pipe fittings? It's got a lot of Gazprom Vexels, IOUs. Now, the machine tool, they also need steel. When they have to pay for the steel, instead of paying for rubles, they payels, IOUs. Now, the machine tool, they also need steel. When they have to pay for the steel, instead of paying for rubles, they pay with the IOUs to Gazprom.

Right. Since everybody does need gas, they all know how valuable it is. I see. So at the end of that term, let's say it's a one-year promissory note, whoever's holding that note... Gets gas. They take it to Gazprom and they get gas for sure? They pay their gas bill. I see.

And then after Gazprom starts doing their IOU system, is that when, what happens then? Then basically everybody starts using those IOUs as a transactions medium. Russian businesses had sort of rapidly evolved a whole new currency. And instead of being on the gold standard, Gazprom IOUs, Vexels, were the gas standard. It was a piece of fancy paper backed by the promise of actual gas. And then a bunch of other businesses started issuing their own IOUs, their own VEXLs. So a company could pay its energy bill using VEXLs from the local power plant, or they could pay their taxes using these kind of tax offsetty VEXL things from the government. Businesses would trade VEXLs or hold VEXLs on

their company accounts. And the literal paper VEXLs, there were all kinds of different colors and shapes and sizes. Just to give you a sense of this, Vladislav Inozemtsev, who was running a bank in Moscow at the time, even his bank had their own vexels. It was gray-blue piece of paper, like in a letter format, with all this, you know, good printing. Good printing, he says. It was printed at a factory that typically printed actual money. And on the back side of the paper, you can see, I would say, six or ten places where you can write in that I transfer this to the company ABC Limited. And so you can just hand it many, many times from one company to another. And if there is no more space, you can come to our bank and we will exchange you another one.

And you can once again transfer it to another company. Do you remember the longest chain of transfers that you saw? Like how many times one of those things passed through different people's hands? 40, 50 easily. Wow. That's incredible. It was every day-to-day practice. Vladislav says there was this weird thing, though,

where his bank's Vexel unintentionally looked a lot like the Gazprom one. And so there were some, you know, kind of collisions when someone took our promise, you know, which was very similar to Gazprom because it was just another name of the company, but the design was the same. Did anybody show up to your bank saying like, hey, you owe us a million dollars? And you're like, no, no, no. Yes.

Gazprom owes you a million dollars. Yeah, it was sometimes. Yes, this was the case. So this was another evolution in the chain of good money replacing bad money in Russia. And so there were all these different vexels that were the good money. And often the vexel that became dominant in a specific region was tied to whatever industry that region was built around. So, you know, in a mining region, that was the vexel from the diamond company. In a Siberian rubber town, that would be the tire company's vexel.

And of course, there was the Gazprom Vexel. And that was valuable anywhere in Russia. Because think about what this piece of Gazprom paper is in terms of the three characteristics of money. Yeah. Number one, Gazprom's Vexel was a great store of value. It was backed by actual gas, a relatively stable commodity. Number two, a means of exchange. I mean, it was a lot easier to sign the back of a paper IOU than to bring, you know, a pile of bricks to the grocery store or whatever. And number three, unit of account. If every business knows about and uses gas,

then it is not necessarily hard to do business in a currency that is basically gas. Yeah, and at one point in the 90s, Russia's biggest companies were doing something like 70 percent of their business using barter and these other non-monetary payments like Gazprom, Vexels. Yeah. It was as if in a way Russian businesses had sort of reinvented money, like these Vexels, these promissory notes. Again, of reinvented money, like these vexels, these promissory notes. Again, Penn State's Barry Ickes. It's like a private money because it's backed by a claim on a commodity.

Like a shadow government and a shadow currency. To some extent, that's a very good way to think about it. Why is Russia still not just using gas promissory notes as money at this point? Sounds like it was functioning kind of as a normal monetary system. Yes, but it's sort of useful only within the industrial sector where people are, you know, buying a lot of natural gas. Plus, you can't really have a banking system. Think about your books. Think about the financial books of an enterprise. You know, if you ever wanted to do anything, you can't do anything. You got IOUs and for all these

different goods, what's your balance sheet look like? This bizarre period in Russia, this post-Soviet bartering and IOU economy, it was really short in the grand scheme of things. It lasted less than 10 years. There were a ton of factors, but generally as Russia stabilized, the Russian ruble also eventually stabilized. And frankly, this whole system was pretty subject to corruption and businesses not, you know, making good on these IOUs. So once the ruble is more stable, it was simply a more efficient form of currency for everyone. And so full circle, the ruble itself became the good money replacing bad money. And one of the reasons I like reporting on money is because a lot of times, and not always,

but a lot of times, it does reveal these realities that we sometimes just overlook, or maybe we forget, or perhaps we're being intentionally misled about. And in this case, like all along in this story, the money keeps telling us this same thing, which is at its core, Russia is a resource economy. And when we talk about sanctions and economic pressure points, it just is important to remember that Russia is and has basically always been a gas station with an army. If you'd like to learn more about the way the transition from the Soviet Union to Russia shapes the landscape today, I cannot recommend highly enough the latest Planet Money newsletter from my colleague Greg Rosalski. You can read that or sign up for it at npr.org slash planetmoneynewsletter.

We're also available on social media generally at Planet Money and also by email planetmoney at npr.org. Today's episode was produced by Sam Yellow Horse Kessler. It was engineered by Isaac Rodriguez and edited by Jess Zhang. Alex Goldmark is Planet Money's executive producer. Special thanks to Clifford Gaddy, Michael Alexev, and Sana Krasikov. I'm Kenny Malone. And I'm Dave Blanchard.

This is NPR. Thanks for listening. And a special thanks to our funder, the Alfred P. Sloan Foundation, for helping to support this podcast.