Trust Vs Illusion : What is Driving Demonetization in the Former Soviet Union?

The virtual economy argument for Russia suggests that barter allows the parties to pretend that the manufacturing sector is producing value added by enabling this sector to sell its output at a higher price than its market value. We confront this prediction with the actual pricing behavior of industrial sectors in Ukraine in 1997. Based on pricing data of 165 barter deals we find no systematic difference in the pricing behavior in non-cash transactions across sectors. What appears to matter for the pricing behavior is whether the firm is on the selling or buying end of the barter transaction. We offer a model which sees this pricing behavior as a mechanism to deal with the absence of trust and liquidity in the economy