Russian exchange rate policy after sanctions

Nowadays the exchange rate regime is consideration “number one” in international economic policy. Lots of theoretical, applied economists and econometricians have made enormous effort to find what determined the level, or the change, of a floating exchange rate and understand its relationship to other economic fundamentals. Let us look into the essence of the exchange rate.

The exchange rate appeared together with the necessity of exchange: the imports and exports of goods and capital. The peculiarity of the modern exchange rate is that it reflects the balance between different economic factors such as gross national product (GNP) per capita, rates of production, development of foreign trade, price movements, quantity of money in circulation, interest rates, as well as forms and methods of currency regulation. Thus, each factor is closely related to monetary policy.

The basic types are a floating exchange rate, where the market dictates movements in the exchange rate; a pegged float, where a central bank keeps the rate from deviating too far from a target value; and a fixed exchange rate, which ties the currency to another currency, mostly reserve currencies such as the U.S. dollar or the euro or a basket of currencies. [2] For example, Russia currently has floating exchange rate in order to provide sustainable prices and keep inflation low.

If we consider the effect of exchange rates on Russia, it can be concluded that the situation is not favorable for the Russian economy. We are witnessing the effects of the globalization process. This leads to closer economic and cultural interrelation with Europe and the United States. The markets of all countries depend on each other including the Russian one. Russia's foreign trade turnover with the main European partner countries makes up about 50 %, so the role of the euro is very important. The ruble is also pegged to the US dollar because it is a world currency. For Russia the exchange rate depends on the oil prices and the prices of foreign goods. This is because the market in the RF is extremely narrow, without diversification. No less urgent for the country is the matter of Russia’s currency devaluation. Some experts attribute the fall of the ruble to active sales of the currency. Allegedly, it was in connection with the withdrawal of funds by nonresident participants of the Russian market to convert these assets into foreign currency. A fall in domestic oil prices has greatly affected the situation too.

Economists agree: the transition to a floating exchange rate has been inevitable and necessary because of the external shocks. At a time when the economy is experiencing difficulties the share of Russian companies and banks in the western capital markets is decreasing due to the sanctions and rapidly falling oil prices, as a result the ruble suffered the brunt playing the role of a shock absorber.

The situation has changed for the better for the ruble- supported exporters. On the one hand, it offered a possibility of intensifying the import substitution production, on the other hand, it allowed companies to fill up the budget with increasing revenues while the Bank of Russia struggled to save international reserves as over the past year they have decreased by $100 billion.

On the negative side, there has been a sharp increase in the volatility of currency exchange rates, which accelerated inflation and, consequently, caused a drop in real incomes, moreover imported goods including food, have become more expensive and less available, further reducing the standard of living .

Sberbank chief analyst Mikhail Matovnikov draws attention to the fact that the volatility of the rates is very difficult to predict, which is especially dramatic for companies which should make financial plans and calculate the amount of investment.

The head of the Central Bank Elvira Nabiullina claimed: "The floating exchange rate regime is the most suitable for the current situation in the Russian economy. We are well aware that the volatility of the exchange rate worries both population and business. But we are trying to mitigate the effects ".

So, we can conclude that the transition to a floating exchange rate of the ruble has both advantages and disadvantages. The opinions have split, but most experts think that the Central Bank of Russia should not completely abandon interventions. The instance of Russia shows the potential of the exchange rate. The Government need to consider carefully what policy to choose, especially in terms of unstable economy.