Russia Exchange Rate System

Topics: United States dollar, Foreign exchange market, Exchange rate Pages: 3 (1007 words) Published: November 12, 2010
Russia Exchange rate system

Russia used to pledge its nominal exchange rate with some main currencies such as US dollar. However, the Russian crisis has forced Russia to develop managed floating exchange rate system, where the exchange rate driven by market forces of the Ruble’s demand and supply with the help of government intervention. With this exchange rate, the government can ensure stability and predictability of ruble exchange rate and prevent abrupt fluctuation of the Ruble rate. Moreover, this system could achieve the target set of money supply growth, and further ensure that the economic agents comply with the Russian legislation regulating foreign exchange operation.

The emerging markets financial crises of the 1990s had remarkable similarities. Attracted by high domestic interest rates, a sense of stability stemming from rigid exchange rates, and what at the time appeared to be rosy prospects, large volumes of foreign portfolio funds moved into Russia. This helped propel stock market booms and helped finance large current account deficits. At some point, and for a number of reasons, these funds slowed down and/or were reversed. This change in conditions required significant corrections in macroeconomics policies. Invariably, however, adjustment was delayed or was insufficient, increasing the level of uncertainty and the degree of country risk. As a result, massive volumes of capital left the country in question, international reserves dropped to dangerously low levels and real exchange rates became acutely overvalued. Eventually, pegged nominal exchange rate of Russia had to be abandoned, and the country was forced to float its currency.

According to the current account on Q4 2009 to Q1 2010, the export of both goods and services are slightly falling, whereas the import of both goods and service are sharply rising from –USD 60.34 billion to – USD 45.7 billion and –USD 17 billion to –USD 13.8 billion respectively. The low export and...
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