Belarus and Russia have announced their intentions and specific plans to achieve monetary unification by 2008. Important intermediate steps contemplated at this stage include a change to an explicit and firm peg to the Russian ruble in 2004 and the introduction of the Russian ruble as the common currency in 2005. Under the plan, the new common currency is to be introduced in 2008.

In view of the strong cultural, political and economic links between Belarus and Russia, the mission noted that monetary union could have substantial benefits in terms of creating trade as economic integration between the two countries deepens. The mission also noted that, prior to embarking on monetary unification, the Belarusian and Russian authorities would at a minimum need to implement the tasks listed in their agreed Joint Action Plan of measures necessary for introduction of the single currency. There would also need to be agreement on key institutional features, including the issue of the single emission center. Moreover, given the depth of differences in economic structures of the two countries, the successful currency unification would benefit from greater strucural convergence and institutional reforms prior to the peg, in particular in the areas of taxation and in the regulatory regime. Monetary union would also require unification of economic data systems. Finally, the nominal exchange rate for the peg would need to be consistent with economic fundamentals.

The Belarusian authorities continue to favor a gradual path of economic reforms. However, in light of the intended change in the Belarusian exchange rate regime to a nominal Russian ruble peg, accelerating liberalization of prices, wages, and labor markets and restructuring of the enterprise sector in Belarus is urgent to ensure flexibility and competitiveness of the economy. Under all proposals, monetary unification would require that Belarus undertakes further preparation of the financial sector (monetary unification would eliminate the NBB's ability to act as the lender of last resort), and implements more institutional reforms than currently under way.

The structural reforms ensuring the flexibility of the economy are necessary, but not sufficient for a successful peg; consistent and coordinated monetary and fiscal policies are also needed. Given the current budgetary stance in Belarus, fiscal tightening will need to precede monetary unification. These measures are essential to ensure that the introduction of a common currency would not lead to high economic and social costs.