How would you classify the exchange rate regime us...
Case Study: Russian Ruble Roulette
How would you classify the exchange rate regime used by Russia
over the 1991–2014 period?
The Russian ruble has experienced a wide range of regime
shift in the economy of Russia since opening in 1991. For the period between
1991 and 1998, the exchange rates were fixed with tight capital control and
were restrictive to all institution. The period was followed by another regime
that ran from 1998 to 2008 where there were heavily managed floating rates. The
shift from fixed restrictive capital control to managed floating rates was due
to the economic crisis experienced in 1998. The regime was going well until the
global crisis that originated from the U.S took place. To protect the value of
her currency the Russian bank spent $200 billion which was a third of its
foreign exchange reserves in 2008 and at the beginning of 2009. In 2009 the
Russian bank decided to introduce a more flexible exchange rate regime which
was a dual-currency floating rate band around. The regime was around a
two-currency basket of the European euro and the U.S dollar. The regime was in
use for the period up to 2014 (Stonehill,
Moffett, and Eiteman).
What did the establishment of operational bands do to the
expectations of ruble speculators? Would these expectations be stabilizing or
destabilizing in your opinion?
The Ruble speculators assume that the moment the market rate
nears the established operational bands the bank would intervene so that it can
push the market rate to the middle of the intervention band where it is
initially set to be. The intervention would be through purchasing Rubles which
is the upper band or selling rubles on the lower Ruble. The goal of intervening
would be to protect the currency by stabilizing its value. From this, in my
opinion, the efforts were to maintain the currency and not destabilizing
because it controlled the value which was obtained in late 2010 where the
currency was stable enough not to need more intervention. The stability gained
allowed for an expansion of the neutral zone to 3.1 rubles from 1 ruble (Stonehill, Moffett, and Eiteman).
Would Western sanctions alone been devastating to the ruble's
value, or was it the plummeting price of oil that had the larger impact?
The sanctions on Russia have a tremendous contribution to
the decline in the value of Ruble. However, it is not the only factor. The fall
in the oil prices happened to occur at the same time when this was going on,
therefore, making the situation even worse. In response to the sanctions
imposed on the country, Russia restricted importing of agricultural products
and any other consumer goods. The result of the decision was an increase in the
cost of local goods, causing inflation and a decrease in the quality of
products available in the local markets ("Western
Sanctions, Ruble Crash Hit Russians Hard").
The Russian agriculture does not have the capacity to meet
its population’s needs when it comes to food. Therefore, it depends on imported
food and through the decision of restricting importation the country and its
people have to strain. As the number of suppliers decreased due to the
sanction, Russia turned to the few available neighboring CISs (Commonwealth of
Independent States) for the importation of goods. The prices of their goods are
however high because they are only a few suppliers, Russia does not have a
choice but to import from them even though the quality of these products is not
up to the standard (Mirzayev).
From September 2014, the ruble depreciated tremendously
against the major world currencies which the Euro and the U.S dollar. Due to
the decline in the exports goods like oil, the flow of foreign currencies in
the country decreased and falling of oil prices catalyzing the process. As a
result, holders of the Ruble panic as the value of the money will continue
declining and lead to selling the currency for Euros or U.S dollars before it
deteriorates entirely. Therefore, the sanction had a significant contribution
on the depreciation of the value of the ruble, but the decline in the oil
prices was a catalyst to the problem (Mirzayev).
Stonehill, Arthur, Michael H Moffett, and David K Eiteman. "Fundamentals Of Multinational
Finance". Chegg.com. Web. 25 Oct. 2016.
"Western Sanctions, Ruble Crash Hit Russians Hard". Mail Online. N.p., 2014. Web. 25 Oct.
Mirzayev, Elvin. "Sanctions & Falling Oil Prices Hit Ruble Hard". Investopedia. N.p., 2015.
Web. 25 Oct. 2016.