Baltic republics fly high after breaking with the rouble: Kroon, lat and litas - new names in the world of international currency. Adrian Bridge charts their remarkable progress since the break-up of the Soviet Union

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The Independent Online
In July 1933, two Lithuanian aviators set off from New York in an attempt to fly the Atlantic and make it all the way back to their homeland. They did not quite make it, crashing in woods in Germany after covering 6,411km in 37 hours 11 minutes.

But Steponas Darius and Stasys Girenas were not forgotten. They became national heroes and achieved immortality last year when Lithuania, once again a sovereign state, issued its own currency.

On one side of the 10 litas note are the aviators; on the other side, their plane. And the currency should do rather better than they did.

Yet when Lithuania, and its fellow Baltic states Latvia and Estonia, decided last year to break free from the hated Russian rouble and set out on the path of creating - or restoring - their own currencies, they were roundly condemned. The International Monetary Fund described the move as 'economic suicide'.

At the time the IMF had thrown its weight behind Russian aims to make the rouble convertible and fully supported the idea of a new 'rouble zone' covering essentially all the territories that used to make up the Soviet Union.

It was not to be, and the people of the three states have not stopped counting their blessings since. As inflation soared in Russia in the months that followed and the value of the rouble plummeted, their own modest currencies successfully held their own against the dollar and German mark, while all three countries managed to bring inflation under something resembling control.

'The cutting off of the (Soviet) colonial umbilical chord enabled us to break free of the inflation catastrophe of the rouble zone,' declared Lennart Meri, the Estonian president, during celebrations last month marking the first anniversary of the introduction of the Estonian kroon on 20 June.

'The kroon is the anchor of Estonia's political and economic success . . . It is not just a piece of paper, it is a symbol of our independence.'

Estonia, smallest of the Baltic republics with a population of just 1.6 million, was nevertheless the first to issue its own fully fledged currency.

Backed by initial foreign currency reserves of dollars 120m, a dollars 40m stabilisation loan from the IMF and 11.3 tonnes of gold retrieved from the pre-war republic's deposits in foreign central banks, it decided to peg the kroon to the Deutschmark at a rate of eight to one.

More than a year later, that rate remains. And, while annual inflation has come down from more than 500 to 30 per cent, foreign currency reserves have more than doubled.

The relatively low inflation rate, strict control over money supply and ever increasing economic ties with neighbouring Finland have all contributed to what some observers refer to as a 'financial miracle' in Estonia, making it a possible model for other former Soviet republics breaking free from the rouble.

Despite a downside of rising unemployment due to the collapse of many Soviet-style heavy industries, even the IMF now concedes that the transition from a command to a market economy appears to be proceeding well. In the words of Adam Bennett, one of the fund's senior economists: 'Regardless of the difficult economic situation, the kroon has so far surpassed all expectations.'

If Estonia has blazed the Baltic monetary trail, Latvia has not lagged far behind. Faced with a chronic shortage of Russian roubles to pay salaries and bills in the early part of last year, it decided in May to issue the Latvian rouble - a transitional currency intended to pave the way for the introduction of the lat this summer.

Far from falling against its Russian counterpart, as gloomily predicted, the Latvian rouble consistently rose, finally reaching a level of 1:8. What is more, after a shaky start, it actually appreciated by 23 per cent against the dollar this year.

Erik Blums, head of the foreign exchange department at the Bank of Latvia, says the secret of the stablility of the Latvian rouble, and now the lat, has been has been high rates of interest on deposit accounts - which at one point reached almost 100 per cent - and a monetary policy 'so tight it would make Keynes blush'.

As in Estonia, inflation has been brought down, from a monthly level of 50 per cent in January 1992 to just 0.3 per cent in April this year. The budget deficit, reduced to only 1.5 per cent of GDP last year, looks set to fall further. Unlike the kroon, the lat is not pegged to any specific hard currency. Since becoming Latvia's official currency at the end of June, however, it has retained an exchange rate against the dollar of around 1:1.5.

The whole process of monetary reform has taken longer in Lithuania. Although the largest of the Baltic states, it has been the slowest on the path of economic transformation.

Only last week did the litas finally become the sole legal tender, replacing the talonas, another transitional currency referred to rather disparagingly by locals as 'zoo' money from the bears, foxes, lizards and birds that adorned its notes.

Like the lat, the litas is not tied to any specific hard currency, although there are plans to peg it loosely to a basket of Western currencies later this year. Romualdas Visokavicius, president of the Bank of Lithuania, has made it clear that he too plans to conduct a tight monetary policy.

He admits, however, that apart from the bank's modest gold and hard currency reserves and the support of the IMF there is little to guarantee the litas' stability.

Unlike the kroon and lat, moreover, the new Lithuanian currency is already suffering from something of a credibility problem. Its very introduction had to be delayed after it emerged earlier this year that many of the new litas notes, printed by the US Banknote Corporation, were of such low quality they would have to be redone at a cost of around dollars 3m. The lower denomination 10, 20 and 50 litas notes, in particular, were found to lack a security thread and have poorly produced watermarks, rendering them easy to counterfeit.

'The bid to save money by cutting printing costs ended up costing dear,' said one Western observer in the Lithuanian capital, Vilnius. 'It was not an ideal start and many Lithuanians still do not have much confidence in the new litas.

'Of course, people hope it will be as successful as the kroon. But at least everyone is agreed on one thing - they will certainly be a better bet than the Russian rouble.'

(Graphic omitted)

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