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The Most Standard Unit
A year ago, the RF State Duma sent the inquiry “On Banning the Use of Standard Units for Setting Consumer Prices” to Prime Minister Mikhail Kasyanov and Prosecutor General Vladimir Ustinov. A draft bill to introduce the corresponding amendments to the Civil Code has still not made it to first reading. Meanwhile, more and more Russian companies tired of keeping track of jumps in the euro and dollar rates are switching to customer payments in rubles without any urging from the deputies. However, as before, the standard unit (the Russian abbreviation is “u.e.” from uslovnaya edinitsa) remains one of the key currencies of commodity-money relations in Russia. Only now, it has ceased to be a popular synonym for the US dollar and has turned into a real standard unit. Today everyone has a specific “u.e.” and the only way to compare prices is to recalculate them in rubles. As a result, sellers have an ideal instrument for disguising inflated prices.
Legal u.e.
Standard monetary units are not a Russian invention (see the reference). However, none of the standard currencies used in international practice have ever penetrated so extensively into the retail market. This is what makes the domestic u.e. unique.
The legitimacy of its circulation in Russia is set out in Paragraph 2, Article 317 of the Civil Code. According to this paragraph, it is permitted to set the price of a contract between the parties to one or another ruble transaction equivalent to the sum in a foreign currency or standard monetary units (u.e.). The amount payable in rubles is determined by the Bank of Russia rate for the corresponding currency or standard unit on the day of payment, unless another rate or rate determination date is otherwise stipulated by law or by agreement of the parties.
Many organizations concluding contracts in u.e. later draw up all corresponding documents in u.e. as well, and most accounting documents can be written out simultaneously in rubles and standard units. In November 2002, the Presidium of the Superior Court of Arbitration issued a special interpretative letter in order to establish a procedure for settling legal disputes involving sums in u.e. or another non-ruble currency.
At the same time, Central Bank Statute #503 “On the Discontinuance in the Russian Federation of Settlements in Foreign Currency for Goods (Labor, Services) Sold to Natural Persons” and a later revision approved in 2000 are in force. They unambiguously prohibit the sale of goods and services in dollars or any other foreign currency. However, there is no mention of a ban on setting prices for goods in any foreign currency. The main thing is that all payments at a sales outlet must be made in rubles and then you cannot fault the seller.
There have been a number of attempts to prohibit u.e., especially after the sharp rise in the euro rate. A number of State Duma deputies prepared a draft bill to introduce amendments to Article 317 back in 2002. The inquiry sent to Mikhail Kasyanov and Vladimir Ustinov in February 2003 stated that fixing consumer prices was inadmissible. It even suggested that the Prosecutor General “verify the observance by managerial authorities and the managers of commercial organizations of laws in force in the Russian Federation governing the setting of consumer prices for goods, labor, and services.” The deputies’ request went unanswered and the draft bill itself is still gathering dust in the archives; its consideration, planned for the fall, has been postponed. Last May, the International Confederation of Consumer Organizations (KonfOP) tried to introduce a number of amendments to the laws, including amendments aimed at eliminating u.e. In view of the reelection of the State Duma, this initiative was also postponed to better times. However, the failures of legislators and consumer rights groups have been partially compensated by market participants themselves.
The Fall of Stereotypes
Even a year and a half ago both consumers and sellers
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| Sergei Mikheev |
| According to cellular operators, cell phones have become so commonplace for Muscovites that the ruble is more appropriate for them. |
took the u.e. as a synonym for the dollar in the overwhelming majority of cases. Of course, in many stores its ruble conversion rate might differ somewhat from the dollar rate at a nearby bank, but on average the fluctuation was an insignificant 1–2%. Companies generally shrouded the origin of these fluctuations in a veil of commercial secrecy. In unofficial conversations accountants and financial managers explained the addition of 1.5–3% to the Central Bank rate as the simple cost of converting money under “gray” schemes.
However, in June 2002, the new European currency overtook the dollar in value for the first time, and by the beginning of last year, this gap began to increase at unprecedented rates. As a result, by the end of 2002, the dollar was no longer the only possible synonym for u.e. A number of companies receiving goods from European suppliers or that had simply decided to cash in on the rate difference announced a conversion to the euro. By mid-2003, this trend took on an almost mass character, and u.e. began to fade into the background. Now the important question for a customer is “are your prices in dollars or euros?”
The domestic ruble played the next dirty trick on the dollar’s position as the main payment unit in Russia. Last year it rose nearly 10% in value against its American counterpart. This strengthening of the ruble lost the u.e. even more of its audience: many sellers who were still using standard units to set the prices of goods switched to ruble price lists.
For example, subscribers to Moscow’s Megafon network have traditionally paid for services in rubles at the Central Bank dollar rate on the payment date. However, the company recently introduced the “Simple” rate, in which service prices are given in rubles. “Cell phones have become so commonplace for Muscovites that costs are comparable to municipal service payments, that is, housing, lighting, gas, and an ordinary telephone. We’ve always calculated these expenses in rubles, and now it’s time for ruble cell-phone rates,” the companies explain. LokIS, a software supplier, abandoned payments in u.e. altogether on January 1 and converted its price list to rubles at the dollar rate set out in the Russian budget for 2004.
On the other hand, one of the consequences of the complicated behavior of the three currency rates has been the appearance of an u.e. that is new for Russians—a genuine standard unit with a value that is impossible to predict. Today each company has its own; moreover, the u.e. may be converted to rubles according to different formulas for different clients.
At the Internal Rate
For example, the internal u.e. rate in the BeeLine cellular network is 1% higher than the Central Bank rate. “In a sense, this is a form of protection against risks that might arise during conversion,” company representatives explain, adding that with time, the system may be revised upward to an extra charge of 2–3%. In Moscow cellular communications chains, prices given for prepayment cards and telephones are based on an internal rate. According to Anna Zhizhina, a manager at Techmarket, prices are primarily influenced by the market situation: “For example, at the end of 2003, the dollar cost of the average “Eurotelephone” increased 8–10% as a result of the increase in the euro rate alone. But retail prices did not increase in direct proportion.” “Russians still aren’t used to the euro, but most of our purchases are made in that currency, so we have to set a higher dollar rate to compensate for the difference in value of the dollar and euro,” admitted Kirill Lubnin, press secretary for Dixis. Today, the average u.e. price spread among cell-phone dealers is about 10%.
The largest Russian airlines sell tickets for international flights mainly through the Gabriel reservation system, in which Aeroflot sets the cross rate. Until January 2003, the Gabriel u.e. was equal to the dollar and converted at the Central Bank rate; but at the end of that month Aeroflot announced a new u.e. price of 30 rubles, promising not to change the rate until the end of the year.
The government of St. Petersburg followed suit this year by fixing a u.e. value of 31.5 rubles for lessees of nonresidential premises and buildings owned by the city in its budget law. Aleksei Chichkanov, vice-president of the local city property committee (KUGI), explained the value of the St. Petersburg u.e. as “a compromise between the property committee’s proposal and the city finance committee’s proposal.” We note that when setting the previous year’s u.e. rate, the property committee referred to a certain complicated calculation formula that made allowance for currency rate fluctuations, inflation indices, the consumer price index, and a number of other factors and even promised to make it available to lessees at some point. Other St. Petersburg business centers followed the property committee and switched to their own u.e. rates, which were not tied to any specific currency.
The Practice of Irrelativity
Many market participants have already launched whole PR campaigns around the difference in u.e. values. For example, the German company Audi made a show of converting its car prices from euros to dollars starting in 2004, fixing the cross rate at 1.19 (which is already lower than current quotations).
Anastasiya Kazakova, head of NTV Plus’s press service, assured us that prices for the company’s services have not changed and that the basic subscription package costs $18.95 as before. “We’re not going to introduce internal rates; we calculate payments according to the Central Bank rate. As a result, we may miss out on momentary profit, but we gain subscriber loyalty, which is the most important thing,” Ms. Kazakova emphasized. “We're not trying to make money on the falling dollar rate,” added Aleksandr Malis, vice-president of the telecommunications company Corbina. “All our prices remain tied to the US dollar, and the company has no plans to change its policy in future.”
The reverse practice is also widespread, that is, use of the u.e. value as a club. For example, Aeroflot recently announced that it would be converting settlements with tour operators for block bookings on popular flights to euros at the end of March. “We will simply adjust dollars to euros in the ticket price,” they explained at the company. “This will decrease the number of block bookings on flights. Aeroflot is not interested in large volumes of reservations from tour operators at the present time.” The company hastens to add that the final ticket price for tourists will be lower than in the case of direct conversion of u.e. to euros, but it has still not explained how this will work.
The number of rate declarations is increasing. However, the difference in the u.e. value in prices for identical goods already prevalent on the market is a much greater danger to consumers than the advertised difference. Today, this difference may be as much as 20%. For example, the u.e. at Sportmaster stores in Kazan is equivalent to 29 rubles, but at Trial Sport, their direct competitor, it is equivalent to 32 rubles. The u.e. value in Moscow retail chains also fluctuates between dollar and euro quotations. Retailers explain that the rate is determined by “contract provisions”, which are a trade secret. Intellect Service, a Moscow software company, has set regional u.e. rates: 32 rubles for Moscow and surrounding areas, 31.5 rubles for sales outside Moscow and Moscow Region, and 31 rubles for Smolensk, Volgograd, and Saratov regions and Stavropol and Krasnodar territories.
Thus, after finally getting a real standard unit of value for goods and services, the Russian market has lost a reference point. The consumer can no longer make a quick and accurate comparison of prices of various suppliers: although identical in u.e., they can differ significantly in ruble terms. Without a calculator handy, there is a high risk of paying an inflated price for an item. As a result, the first question the potential customer has to ask in a store is “what is your u.e.?”
RENATA YAMBAEVA, AFANASY SBOROV
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INTERNATIONAL PRACTICE
World-Scale u.e.
One of the first internationally recognized artificial currencies were the so-called special drawing rights (SDR). They were devised in 1969 by the International Monetary Fund (IMF) as a result of limited gold production and expanding world trade volumes. The first SDR issue came out in three stages between 1970 and 1972 in the amount of $9.5 billion. The value of this standard unit was initially fixed at the gold equivalent, but starting in June 1974, it was determined relative to a weighted average basket of 16 currencies (the United States, European countries, South Africa, and Australia). Formally, SDR take the form of credit notes on special IMF accounts proportional to the quotas of participating countries. SDR can be used to obtain currency from a number of specially accredited countries for operations under bilateral agreements between participating countries and for some operations recorded in an IMF joint account. As of February 19, SDR cost 43.06 rubles at the Central Bank of the RF rate.
In March 1979, the countries participating in the European currency system established their own currency unit, the European Currency Unit (ECU). The ECU rate was calculated on the basis of a basket of currencies of the 12 EU countries. In contrast to SDR, an ECU issue was partially cashed by gold and dollars and had wider application, including in commercial contracts. However, in form, the ECU was also merely a note in the accounts of central or commercial banks during cashless funds transfers. The ECU was transformed into the euro at the end of the 1990s.
STRAIGHT TALK
What is your u.e. equal to?
Lev Koshlyakov, deputy general manager of Aeroflot:
-- We tie ticket prices for international flights to the dollar at a fixed rate. Our u.e. is equal to 30 rubles. This allows more efficient planning, insures against the risk of currency fluctuations, and prevents difficulties with accounting policy, making ticket prices more predictable. However, in reality, Aeroflot operates in many currencies. But given that our main markets are in Europe, from here on we will be using euros by agreement with major tour operators.
Natali Golitsyna, president of Russian Club:
-- My u.e. is equal to the dollar, because I’m used to dollars. You won’t have to guess which national currency we use, dollars or rubles. Everyone in Moscow was so confused that it’s easier to just use the dollar. In Europe we have to convert payments to euros. This is really inconvenient. I pay my employees in rubles, because they’ll lose on the dollar.
Lev Khasis, chairman of the board of directors of Perekrestok Trading House:
-- Different rates in different companies: 29, 30, or 32 rubles. Although we’re gradually converting to the euro. We sell mainly ruble goods and we operate with rubles, but the budget and other accounts are drawn up not only in rubles, but are also duplicated in dollars at the Central Bank rate. I think it’s time to switch to a more natural equivalent, something like the Big Mac Index. Here in Russia we also need to invent some kind of local unit, maybe a kilowatt of electricity, a liter of gasoline, or some other fast-selling item.
Aleksandr Livshits, deputy general manager of Russian Aluminum:
-- In depends on the contract terms. If we’re delivering to America, the u.e. is equal to the dollar; if the delivery is to Europe, it’s equal to the euro. But in my view, the best u.e. would be the gold ruble, since it at least has a precious metal content, which the dollar and the euro haven’t had for a long time.
Dmitry Lebedev, chairman of the board of MIEL Real Estate:
-- In our company, as in most others, everything is calculated only in dollars at the usual Central Bank rate. We’re used to it.
Evgeny Kogan, managing director of Ananta Capital investment company:
-- Today, an u.e. of 30 rubles is the usual thing. We have no u.e. for our clients. There’s a normal ruble and a normal dollar. When I come across u.e. in everyday life, I compute everything in rubles. We have to respect our own currency. I think that if you’re an importer, fine, hedge your risks with currency contracts, but not with prices in u.e. This might have made sense when the ruble was unstable, but not now.
Dmitry Tashchev, executive director of foreign relations for BP Russia:
-- We have no u.e. of any kind and have never used them. All settlements are made in rubles only.
Oleg Sysuev, first deputy chairman of the board of directors of Alfa Bank:
-- Thankfully, we’re a serious credit organization, so we’ve never had u.e. A dollar has always been a dollar and a ruble, a ruble, which is why our clients trust us.
Arsen Shagnev, director of the group Mumiy Troll:
-- Our payments used to be mainly in dollars, but now we like the euro better. There are a lot of advantages: the bills are more convenient, especially the 500-euro bill, and there are fewer counterfeit and spoiled bills. We operate with rubles for noncash transactions within the country and with euros for settlements abroad. Money is always money, whatever it is, and it’s always nice to have it.
Vasily Vorushilov, director of the tour company Meridian Express:
-- It used to be the dollar, but now we’ve switched to the euro. Today, about 80% of tourist agencies have adopted euros, because the dollar is falling. Besides, the main destination is Europe.
Vladimir Skvortsov, general manager of Alfa Insurance Group:
-- We measure everything in dollars and rubles. Insurance products are measured in dollars at the Central Bank rate, which has historically been the custom, and we’re not planning to switch to euros. I don’t understand why stores, for example, arbitrarily changed the u.e. from dollars to euros, increasing the cost of goods by 10–15%. We can’t treat the consumer that way. We pay salaries in rubles at an internal rate of 30 rubles to the dollar. There’s a lot of hysteria around the euro today, but succumbing to the general panic goes against our principles. We’ll wait.
Nikolai Studzinsky, an artist selling at Izmailovo:
-- My u.e. is one set of nesting dolls (matreshka). I know how much work I’ve put into making it and how much I want to get for it. If the dollar falls, a matreshka or a Grandfather Frost (Ded Moroz; strangely enough, they’re still in demand) will cost $10–15 more. At the company where I work, they use a standard rate of 30 rubles to the dollar for internal settlements and the bank rate for client settlements.
Mariana Maslennikova, vice-president of Planeta Fitness:
-- The u.e. generally has a certain relative character, but in actual fact we’re attached to the dollar, since the u.e. rate in our clubs is closer to the dollar rate than the euro rate.
Sergei Bobrikov, general manager of Komus company:
-- We measure u.e. in both dollars and euros when we import goods and in dollars when we sell them in Russia. We’re not planning to switch to the euro, because the entire office supply market in Russia makes payments in dollars. This is connected with the large proportion of Asian deliveries, where all contracts are in dollars. In addition, for various reasons, some European and Russian manufacturers make payments in American dollars. Therefore, switching to the euro in a dollar market with constant rate fluctuations that don’t favor the dollar could lead to increased prices and a decrease in competitiveness. Finally, I trust the dollar.
All the Article in Russian as of Feb. 23, 2004
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Photo: Andrei Bilzho
