Chap2 Minicase

Topics: Foreign exchange market, Currency, Monetary policy, Central bank, Inflation / Pages: 5 (745 words) / Published: Jul 5th, 2015
Mini Case 2
Russian Ruble

Russian Ruble Roulette: Case
1. How would you classify the exchange rate regime used by Russia for the ruble over the 1991–2014 period? 2. What did the establishment of operational bands do to the expectations of ruble speculators? Would these expectations be stabilizing or destabilizing in your opinion?
3. What would a depreciating ruble mean for Russia’s commercial trade and its war on inflation?

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Exhibit A Russian Ruble/U.S. Dollar Exchange


© 2015 Pearson Education, Inc. All rights reserved.

MiniCase: Russian Ruble Roulette


After a number of years of a highly controlled official exchange rate accompanied by tight capital controls, the 1998 economic crisis prompted a movement to a heavily managed float.
Using both direct intervention and interest rate policy, the ruble held surprisingly steady until 2008. But all of that stopped in 2008 when the global credit crisis spread to Russia.
As illustrated by Exhibit A, the impact on the value of the ruble proved disastrous.
In an effort to protect the value of the ruble, the Bank of Russia spent $200 billion—a full one-third of its foreign exchange reserves—throughout 2008 and into 2009.
The new system was a dual-currency floating rate band for the ruble. A dual-currency basket was formed from two currencies, the U.S. dollar (55%) and the euro (45%), for the calculation of the central ruble rate.
Around this basket rate, a neutral zone was established in which no currency intervention would be undertaken. This initial neutral zone was 1.00 ruble versus the basket. Around the neutral zone, a set of operational band boundaries were established, an upper band and lower band, for intervention purposes.
If the ruble remained in the neutral zone, no intervention would be made. If, however, the ruble’s value hit either operational band, the Bank of Russia would intervene by

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