Russian ruble intervention policy

Abstract

Russia has been gaining a lot of importance in the world economy. It has been hailed as one of the important countries in the future. The term BRIC was coined by Goldman Sachs in 2001 to denote the rapidly growing developing economies of the world. This includes Brazil, Russia, India and China. GS predicted that due to the high growth rates of these countries, the combined GDP of these economies would eclipse that of the combined GDP of the current richest countries by 2050. On the other hand, there has been many accusations that the economy has been overly dependent of oil exports for its revenues, and hence, development. This reasoning is not entirely unjustified as Russia has been through many economic crises which have shattered the confidence of the international community in the strength of the Russian economy. These doubts have been accentuated by the political instability that has plagued Russia throughout the twentieth century. This project aimed to study the various crises that Russia has been through in the twentieth century with a special emphasis on the current (2008-09) crisis that is still not over. Although we have studied all the financial aspects of the crises, our main objective was to study the exchange rate policy of the government and its role in the crises over the years. Our findings suggest that the Russian government has not managed its currency, the ruble very effectively. Due to extreme inflation levels, the ruble has been redenominated 6 times in the twentieth century and eventually “1 seventh ruble = 5x1015 Oniginal rubles”. Thus, we see that the ruble has historically been unstable keeping foreign investment away from the country, thus hampering its development. The pegged exchange rate policy has been a constant target for attack by economists the world over. It has been argued that this policy has catalyzed the crises, if not caused them. Our analysis also suggests the same. A floating exchange rate policy could have stimulated the domestic industries and exports. However, we do agree with the government policy of devaluing the currency in steps and not at once, which would have caused panic and deepened the crisis. The recent crisis management has been managed well, even though there have been severe attacks on the policies of the Russian government. We also aimed to draw parallels between the 1998 crisis and the current economic crisis. In this step we concluded that the two crises do look very similar. However, from this, we found that even though Russia is even more dependent on oil now than it was then, it is much better equipped to handle the crisis now than earlier. The economy is fundamentally much stronger, as a result of a golden decade of prosperity and rapid economic growth between the two crises. Finally, we conclude by noting that Russia’s recovery will depend heavily on the rebounding of oil prices. However, in the future, to avoid more such crises, Russia would do well to reduce its dependency on oil and slowly transform its exchange rate policy to a market based system with minimum intervention.