Author: Juhani Laurila
1995. 145 pages
Publisher: Bank of Finland
ISBN 951 – 686 – 469 – 4 (Printed publication)
Contents
1. Introduction and definitions
2. Clearing trade in the economic history of Finland
3. Description of Finnish-Soviet clearing
4. Sources of strength and weakness to the Finnish-Soviet clearing
5. Concluding remarks
Introduction
The subject of this study is the clearing arrangement between Finland and the Soviet Union in 1945-1990. The clearing trade formed a base for the economic relations between these two countries. It provided the Finnish business community, industrialists, politicians and authorities with a protected and familiar framework for promoting trade with the Soviet Union for more than 40 years. Questions about the legitimacy of clearing were occasionally raised from time to time after the 1960s, both in Finland and the Soviet Union. The usual conclusion was that there was not sufficient reason to change the system. Otherwise, one had to be at least sure that trade with freely convertible currencies would create better conditions for the development of trade between the two countries.
The Finnish-Soviet clearing system was often presented, particularly in Soviet propaganda, as an example of how a large socialist country and a small capitalist country can engage in useful cooperation and trade. Finland's foreign trade with non-socialist countries comprised about 80 per cent of its total foreign trade. This trade with western market economies underwent major changes from the fully controlled trade that still prevailed in the 1950s to completely deregulated trade by the end of the 1990s. A less publicised but equally interesting aspect is that Finland, being a market economy itself, experimented with a regulated, centralized trade regime with socialist countries side by side with increasingly -- and by the end of the 1980s fully -- deregulated and decentralized trade with market economies, using convertible currencies.
This study describes how it was possible for this two-tier system to be technically and administratively carried out in practice. The findings of the study support the view that clearing could be maintained with the support of the free market system. Prices and exchange rates were more keenly followed in the Finnish-Soviet clearing trade than, for instance, in CMEA clearing. As soon as convertible currencies could be used in Finnish-Soviet trade to settle trade-related payments, clearing was displaced by the more dynamic free market system.
The Finnish-Soviet clearing system differed from other bilateral international clearings. It was the first and last of all clearing arrangements between the industrialized market economies and the Soviet Union. This leads us to ask what were the specific circumstances that allowed for the longevity of this arrangement? How did the Finnish-Soviet clearing system differ from many largely similar clearing arrangements that operated and indeed still operate today in different parts of the world? What are the possible lessons to be learned as to the future applicability of this kind of payment system?
On the one hand, this study will focus on the description and evaluation of the clearing payment system more than on the clearing trade. The Finnish-Soviet clearing payment system is less well known than the trade system. Finnish contemporary discussion was mostly confined to actual trade developments and problems. Any possible payment problems were handled with the due discretion of the banks. Therefore the clearing mechanisms and technical solutions were little known and understood. For this reason an effort is made here to meticulously record their most central technical features before they are firmly locked up in archives and forgotten.
On the other hand, it is not possible to describe and rationally assess the payment system apart from the trade regime. Therefore, an effort has been made to put the Finnish clearing trade into a historically and internationally commensurable context. The purpose is to identify similarities and differences between the objectives and approaches taken.
Developments in the 1980s will be given more exposure than the earlier history. The 1980s were the most stormy period in the history of the Finnish-Soviet clearing arrangement and led to the demise of the clearing system at the end of 1990. The period 1945-1970 was relatively calm from the standpoint of the clearing arrangement. During the period, the Finnish-Soviet clearing arrangement was administered as one of many such arrangements which Finland had with other countries in the 1950s and yet in the 1960s. At the same time, extensive monetary controls were maintained. The regulative legislation forbad everything what was not specifically allowed and the administrative task was fairly easy. In the process of deregulation, this principle was turned around during the 1970s and particularly in the 1980s. Then everything became allowed except what was specifically forbidden. This turned clearing administration into an insulated island in the midst of increasingly deregulated foreign exchange administration. Clearing administrators were left alone to defend clearing in a rapidly changing economic and financial environment.
In this first section general concepts, definitions, overall objectives and preconditions for international clearing systems are introduced. To provide the reader with some background in clearing trade, Finland's trade with east and west is described in section 2. The orientation of Finnish trade towards the west goes all the way back to the last part of the nineteenth century when the Grand Duchy of Finland formed an autonomous part of Russia. As will be seen, Finland's trade relations have a lways been strongly influenced by the swings in world politics and characterized by strong partner- ships with Germany and Great Britain.
The emergence of clearing arrangements in Finland was connected with the worldwide Great Depression of the 1930s. Finland also participated in the gradual dismantling of the international clearing arrangement of post-war Europe. The destiny of the Finnish-Soviet clearing arrangement was to collapse along with the collapse of an entire epic in world history. The larger collapse comprised the dissolution of the Soviet Union and the disappearance of the organizations involved in the Finnish-Soviet clearing regime.
An effort will be made to find broad-ranging answers for foreign readers and to perhaps introduce some new aspects to Finnish readers by discussing Soviet-Finnish clearing in an international context. Historically, the EPU and the CMEA and other multilateral arrangements started as groups of bilateral arrangements, similar to the Finnish-Soviet clearing arrangement. The purpose here is to examine the extent to which the objectives and conditions of Finnish-Soviet bilateral clearing differed from these other clearing arrangements and what features they had in common. The applicability of clearing systems is studied briefly in light of the discussions of van Brabant, Bofinger, Rosati et al., as regards the applicability of clearing arrangements and payment unions in reviving trade and developing convertibility and payment transfers in the CEEC and between CEEC and the FSU.
In section 3the institutional and technical features are described in fairly great detail. One purpose of this chapter is to document these features while the source material and knowledge of the persons involved in the clearing operations is still available. Another purpose is to illustrate how complex and demanding the administrative aspects of clearing evolve if the system is maintained in a deregulated and competitive market environment like that of Finland in the 1980s. This aspect should be relevant when assessing the viability of payment systems and clearing in transitional situations.
Various aspects, strengths and weaknesses of Finnish-Soviet clearing are analyzed in section 4. This study does not aim to pass judgement on whether or to what extent clearing was "good" or "bad" for Finland. Costs and benefits can be enumerated as is done in section 4.2. Rather, in this context doubts are expressed as to whether even any forthcoming serious research in economic history will be able to pass any final, unambiguous overall judgement on this question. Still, most of the allegations remain outside the scope of this study and are left for future research.
Section 4 also discusses the Finnish experience with the most central issues in the administration of clearing :
the significance of and problems involved in maintaining the clearing balance, particularly between unequal partners as to size and economic strength, the importance of contantly following marketdetermined prices and foreign exchange rates,
the effects of financing and the importance of maintaining a balance between clearing and convertible currency trade when they are administered side by side, and the role and efficiency of controls in such a situation. A few conclusions can be derived from the Finnish experience.
These are briefly summed up in section 5. There is not much source literature about the management and manageability of the Finnish-Soviet clearing arrangement on the Finnish side. In this context the critical assessment of Tervonen (1993) should be mentioned. Salminen (1983) has analysed the institutional set-up and the interplay of various agents and pressure groups from business, politics and administration in decision making related to Finnish-Soviet trade. Salminen notes that the interests of pressure groups are integrated and mixed (1983, p.34) and not very transparent, because the decision makers are scattered among different ministries and offices (see eg Kallonen 1987). In this study these questions and problems will be approached from the viewpoint of the financial administration of the clearing arrangement.
One analytically interesting angle is provided by Oblath and Pete. According to them, Finnish-Soviet clearing was made institutionally and functionally viable by the application of the duality principle. This principle implied that clearing had to be isolated from, but also integrated with, the rest of the economy (Oblath -Pete 1985, pp.183-185). These ideas will be revisited in this study in order to see how the application of these principles reinforced the clearing arrangement in the liberalized economic environment of the 1980s, and how they ultimately also reduced the manageability of the Finnish-Soviet clearing arrangement.
The purpose of the study is not to develop a theoretical frame-work for analysing the macroeconomic effects of the arrangement on the Finnish economy. Some researchers even claim that it is not possible to develop a theoretical framework that would explain the Finnish-Soviet clearing arrangement. According to them, the theory of international trade, although generally valid, cannot be readily applied to the analysis of specific administrative arrangements between two such different types of economic systems (Reinikainen &Kivikari 1983, pp.24-25, Kivikari 1983, Volk 1985, p.395).
Despite these warnings Tolonen, for instance, made an effort to develop an analytical framework for showing how bilateral trade flows affect a market economy trading with a centrally planned economy. He found, for example, that the effects transmitted by clearing trade regimes and price shocks to the market economy could be both cyclical and countercyclical (Tolonen 1985, 1987a and 1987b).
An important and comprehensive study on the role of Finnish-Soviet clearing trade and its macroeconomic effects was done at the Research Institute of the Finnish Economy (ETLA 1986). It used input-output analysis to identify the effects of clearing trade on employment and imported inputs. It also analyzed the effects of oil price changes on clearing and the effects of clearing trade on Finland's macroeconomic performance. This study, like many others, concludes that clearing was beneficial to the Finnish economy. This view has been most strongly expressed by Finnish industry, one of the major beneficiaries of Finnish-Soviet clearing (see also Kivikari 1985, Koivumaa-Valtonen 1990, Sutela 1992).
As an English language source on the contemporary discussion, we would recommend "Finnish-Soviet Economic Relations", edited by Kari Möttölä, O.N. Bykov and I.S. Korolev and published in 1983. The book contains a representative selection of articles written by contemporary Finnish and Soviet trade policymakers, officials and researchers directly involved in the Finnish-Soviet clearing regime. The articles provide the reader with a fairly authentic synopsis of the facts and the spirit of the period when the clearing trade was at its peak and the problems created by rapidly falling oil prices were not yet felt. The book's appendices contain full English texts of the most important treaties and agreements concerning Finnish-Soviet clearing.
Kivilahti and Rautava have brought the developments up to date in their articles published in the Bank of Finland's Monthly Bulletin and other publications (Kivilahti 1977, 1985, Kivilahti-Rautava 1990). Also the texts of Holopainen and Hirvensalo are recommended (Holopainen 1981, 1982, 1983 and Hirvensalo 1979, Hirvensalo - Kivilahti 1977). All these authors have been personally involved in the operation of the Finnish-Soviet clearing arrangement. The approach taken by Hirvensalo in "The clearing System for Payments between Finland and the U.S.S.R. (with an English summary) is very close to the approach taken in this study (Hirvensalo 1979).
Kajaste has studied specifically the issue of clearing prices, that is, whether clearing prices were advantageous to Finnish exporters. In the more analytic recent studies Sutela has touched upon several controversial aspects of Finnish- Soviet clearing (Sutela 1991c, 1992). Sutela has also considered the reasons for the abandonment of Finnish-Soviet clearing (Sutela 1991d). This discussion will be revisited in section 2.4.1. Section 4 elaborates on the issue of clearing becoming redundant and unmanageable in a deregulated and cost-conscious economic environment.
An exhaustive list of studies on Finnish-Soviet trade relations is not the aim here. A recent review on earlier macroeconomic studies has been prepared, for example, by Hirvensalo (1993, pp.24-29).
Results of this study confirm the fairly widely-held view that Finnish-Soviet clearing worked well in the regulated economic environments of the 1950s and 1960s for which it was intended. As a trade system the Finnish-Soviet system failed because it was not able to adjust the trade volumes to rapidly changing prices. The benefits were accompanied by certain costs. The costs were often carried by quarters other than those that received the benefits. This in turn created difficulties and differences of opinion as to the usefulness of clearing. Major problems in clearing adminis- tration were caused by the unpredictability of exogenous factors like changes in oil prices. Although the changes could have been anticipated, those in charge of the clearing did not have adequate means to adapt the trade flows in order to maintain the clearing trade "on a high and balanced level".
The longevity of Finnish-Soviet clearing was based on the political decision of the Soviet Union to maintain a high level of trade with Finland. Whether the payment system was part of the deal cannot be definitely answered. Probably the majority view shared by both parties was that trade based on convertible currencies would have represented a leap into the unknown and so bilateralism was accepted as the more secure alternative to maintain the continuity and high level of trade. Finnish-Soviet clearing itself was never used as a transitional instrument for promoting the convertibility of currencies or multilateralization of trade, as was true of some other international clearing arrangements.
The lessons to be drawn from the Finnish experience suggest that clearing can be used to overcome the obstacles to trade created by non-convertibility and the lack of access to banking services. The budget constraint for clearing must be seen to maintain a sound regime. Prices and foreign exchange rates are market related and should always be visible. Financing should be limited to technical credit. As soon as the partners' currencies become convertible and clearing cannot be maintained concomitantly with the convertible currency trade, the former must give way. The principal lesson to be derived from Finnish-Soviet clearing is that in such circumstances convertible currencies displace clearing payment systems because of their own dynamism, flexibility and other merits.