News2013.04.15 13:43

Rouble-litas-euro: Lithuania's sour experience of currency change 2013.04.15 13:43

The Government has decided that Lithuania must have the euro by 2015, whatever the cost. Finance Minister Rimantas Šadžius, though, admits that ordinary people are a little suspicious of a currency switch – remember as they do the last monetary reforms in the country that went less than smoothly. 

The Government has decided that Lithuania must have the euro by 2015, whatever the cost. Finance Minister Rimantas Šadžius, though, admits that ordinary people are a little suspicious of a currency switch – remember as they do the last monetary reforms in the country that went less than smoothly.

After Lithuania declared its independence from the Soviet Union, it has changed currencies twice. Economists, politicians, as well as law enforcement officers still remember how the processes of rejecting the rouble and introducing the litas were accompanied by shady dealings and how criminal elements managed to exploit the period of radical change.

Underground printing of money

The issue of introducing national currency was raised as soon as the Supreme Council declared Lithuania an independent state in 1990. Inflation was raging across the Soviet Union and it was made even worse by the banknote “reform” authored by the then Prime Minister of the USSR Valentin Pavlov.

Money was losing its value at such a pace that the Central Bank of Moscow could not print enough rouble notes. The Lithuanian leadership had to come up with a way – and do it fast – of getting a separate currency and thus hopefully curtailing inflation.

Temporary vouchers were introduced that were soon dubbed “animals” (the notes were decorated with pictures of animals) or “vagnorkės” – after the then Prime Minister Gediminas Vagnorius. Beginning in 1991, these vouchers were used as universal method of payment and had to be presented in addition to roubles. Very soon, vouchers became the principal means of conducting economic transactions.

The way that the first issue of “vagnorkės” was printed remind an episode from a spy novel. According to Vagnorius himself, even though Lithuania had already declared independence, it was not recognised de jure by the rest of the world and Soviet special services were still operating within its borders, so the new currency had to be printed in total secrecy.

“Numerators were brought separately from Sweden, dye – from Germany and Switzerland. Everything was assembled in Lithuania and the notes printed almost in the underground. Despite the challenges, several months after the tragic January events (in 1991), the vouchers were put into circulation,” the former prime minister recalls.

Meilutė Jasienė, director of the Finance Department at the Faculty of Economics of Vilnius University, was heading the Foreign Relations and Information Department at the Bank of Lithuania in 1992. She recalls that not everyone was happy with the plan of having a national currency: “Great many people from the Soviet banking establishment actively opposed the introduction of our own money. Some people simply did not understand it, some wanted to protect their own interests and remain in the rouble zone.”

Financial diversions

Having started pursuing independent monetary policies, Lithuania feared that the occupying forces might flood the country with inflated roubles.

And there already had been a precedent for that. In summer 1990, Mykolas Burokevičius, the first secretary of the Communist Party who was loyal to Moscow, founded the Association of Free Entrepreneurs and used the Bank of Naujoji Vilnia, one of the first commercial banks in the country, to finance it. The USSR State Bank granted the Bank of Naujoji Vilnia the status of an all-union bank, opened an account, and extended a credit of 280 million roubles for the year 1991.

Zigmas Vaišvila, who was then deputy prime minister and head of the State Security Department, says that great many individuals close to Burokevičius' party became stinky rich via the Bank of Naujoji Vilnia: “Russians would pay all military officers, communist youth leaders, party figures, the entire Burokevičius gang. They'd lend as much money as they wanted. Many people made a fortune during the inflation. Including KGB officers.”

Vagnorius' memories from this period of radical change are similar: “Over the years 1991-1992, the politicized financial system of Russia could have dumped fictitious roubles on the Lithuanian market. In 1991, between the January putsch and the August putsch, a fictitious rouble emission was carried out via the Bank of Naujoji Vilnia.”

Where did roubles go?

The transition from the rouble to the temporary currency, the vouchers, was by no means plain sailing either. Legends and suspicions abound regarding the fate of rouble notes that were taken out of circulation. There were talks that Vilnius criminal bosses capitalized on the money.

Journalist Dailius Dargis, who has investigated the fate of Russian roubles, quotes prosecutor Gintaras Jasaitis of the Prosecutor General Office. “How were the rouble notes taken out of Lithuania? On what aircraft? A little information leaked out at the time, but no one did anything about it. I am certain that special services were well informed about the circumstances,” the prosecutor once commented.

There are still legends in Vilnius about how shrewd underground characters with links to the Russian nomenklatura or the new Lithuanian government would load worthless roubles onto trucks or planes and secretly take them to the Soviet Union where they'd use the money to buy tangible assets. They'd later sell them and make some capital for their further ventures.

No control over money flow

Former prime minister Vagnorius says he has heard similar talks but attaches no particular importance to them: “Late Bronislovas Lubys, who was the prime minister at the time, could tell you more about the deportation of rouble notes. But I do not give credence to these rumours. If it were indeed so, then Moscow – more than capable and willing to defend its monetary interests – would have made a scandal of it,” he says.

It was not easy to control such massive flows of cash, especially for the newly established law enforcement institutions of the young state.

“Back then, the Lithuanian government had no real control over the border or certain financial instruments. It was impossible to control rouble flows. Russia's central bank was printing money offhandedly. While switching to our own currency, it was the Bank of Lithuania that was collecting rouble notes. It kept a record and was obliged to return the notes to Russia. But it was a time when governments followed one another. Hyperinflation hit Russia later than it hit Lithuania. Against this background, opportunities during the transition period to abuse the system were more plentiful than one can imagine now,” Vaišvila recalls.

Economist Vladas Terleckas, who was one of the Independence Act signatories, tells 15min about negotiations with the Russian State Bank on the terms of the handover – the roubles, taken out of circulation in a civilized way, were to be kept in the vaults of the Bank of Lithuania.

“And this was what the first management of the Bank of Lithuania did. When they resigned, in 1993 and later, the media used to run stories about shipments of roubles to Russia, about the money being lent to commercial banks. Perhaps someone did business. How could it have been otherwise, as the board of the Bank of Lithuania was made up of yesterday's policemen and similar “bankers”,” he says.

No protection against counterfeiting

The second monetary reform in Lithuania happened in 1993, when vouchers were replaced with litas. Once again, controversial decisions and suspicions of KGB involvement were plentiful. Moreover, the first issue of litas notes was of particularly bad quality. 

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