Floating exchange rate of the ruble - what does it mean? What threatens the floating exchange rate of the ruble?

2024 Author: Howard Calhoun | [email protected]. Last modified: 2023-12-17 10:16

The floating exchange rate of the ruble is a complete refusal of the state authorities of the Russian Federation from the process of regulating the national currency in relation to the currencies of other world states. The direction of movement of the exchange rate is formed solely on the basis of market laws of supply and demand. At the moment, only a few countries successfully practice this policy format in relation to their banknote. A more common economic regime is a regulated exchange rate.

Specifics of the floating and fixed exchange rates of the ruble

The transition to a floating exchange rate of the ruble means stopping the use of a single currency corridor, within which the value of the national currency varies within clearly defined limits. Upon reaching the upper limit or the lower one, the monetary authorities activate their forces, which are sent to stabilize the exchange rate. Intervention in most cases takes place in the format of interventions. Conversion-type transactions with the national currency and reserve signs are actively implemented on the open market.

BeforeSince the adoption of the floating rate at the Bretton Woods agreement back in 1944, the fixed exchange rate system determined the obligations of Central banks, which independently set the rate of their currency, to take full responsibility for changing foreign money in accordance with the accepted quotations.

Disadvantages of a fixed rate system

Floating exchange rates were legalized in 1944 after the obvious disadvantages of a fixed rate were noticed. The main disadvantage is the rigid boundaries in terms of the development of the internal economy of the state and the rigid framework for entering the world arena. The second obvious shortcoming of the policy is the bias of quotes in relation to each other. This has a direct connection with the specifics of the individual development of each state. Thus, one country may experience severe economic difficulties, while another will be characterized by strong and robust financial he alth. Such an imbalance will lead to the fact that a flourishing country will face a number of problems due to an unfavorable situation on the territory of another state.

Disadvantages of floating rates

In turn, the system of floating rates, which completely eliminates all the disadvantages described, is also characterized by a number of disadvantages. It is worth mentioning the high volatility of the market, which many traders very quickly turned into an advantage and the basis of their earnings. Sharp fluctuations in exchange rates have a negative impact only on the export-import operations of the internationalmarket.

Floating exchange rate in Russia

For the first time since 1999, a regulated currency regime was initiated on the territory of Russia. The decision was made in connection with the default that took place in 1998. After unfavorable events in society, the government of the Russian Federation was able to eliminate the negative impact of the external economy on the national financial sector. Already in 2005, such a concept as a dual-currency basket was introduced, in which a tandem of the dollar and the euro was used. It opened wide prospects for regulating the country's currency. After the ruble was pegged to the two most powerful monetary units in the world, the focus on the US economy was instantly weakened.

Until 2009, government authorities actively intervened in the currency market quotes only in the situation when the value of the monetary unit began to actively move towards the border of the corridor. After the global crisis in 2008, the rule was abolished. The government can actively intervene in the movement of quotes, regardless of whether they are within the corridor or outside it.

A trip to history

For the first time in 2005, Deputy Chairman of the Central Bank of the Russian Federation Ulyukaev spoke about Russia's transition to a floating exchange rate. He proposed switching to this type of policy between 2010 and 2015. At that time, the rationale for changing policy was explained by the need to weaken the ruble due to a sharp increase in export earnings. The decision was considered in completely uncharacteristic economic conditions for the present moment. These are financial stability, and the high cost of oil, and the stability of the exchange rate, and a favorable balance of payments.

Why did the floating rate program fail?

The floating exchange rate of the ruble is a serious program for the transformation of the economy, which has been actively prepared since 2012. Its implementation was tentatively scheduled for early 2015. Due to the situation that has changed compared to 2005: sanctions pressure, the fall in the cost of "black gold", the recession in the economy, the effect of the government's actions turned out to be the opposite. The ruble weakened against the dollar and showed unprecedented volatility. At a time when only the active policy of the Central Bank of Russia could improve the situation, it, on the contrary, decided to withdraw itself and actively adheres to its position. It is problematic to say what the floating exchange rate of the ruble means for Russia, since the effect of its introduction has not been achieved.

Floating exchange rate and economic instability

The floating exchange rate of the ruble is the financial policy of the state, which is unacceptable to apply in an unstable economy. This is due to the fact that this pattern of government behavior only increases the risk of currency instability. An interesting fact is that the advice of the best "world experts" who advise the government of the state is very different today. In particular, according to the representative of the Investment Bank, the floating rate regime is absolutelyunacceptable in connection with the severe sanctions imposed on the state with a sufficiently large corporate external debt of the state. A financial expert makes a confident forecast regarding the instability of the state, both financial and price. Andrei Belousov, who holds the post of assistant to the president, publicly declares that, despite the introduction of a floating exchange rate, the country is still not ready enough for this. Fears are related to the fact that the volatility of the monetary unit may lead to a complete destabilization of foreign trade transactions as a result of the inability to fulfill obligations under previously concluded contracts.

An analogy has been drawn since 1993, when in the middle of spring, due to the fall of the ruble, most of the country's large companies were forced to terminate long-term contracts, incurring very significant losses. As world practice has shown, the floating exchange rate of the ruble is a monetary policy that can effectively manifest itself only in states where the economy is developing at an active pace, and industry is in its prime. In this case, the main export item should belong to production.

Floating rate around the world

Floating exchange rate regime is set in only 34% of the world's countries. The indicator includes 65 countries, of which 29 practice a floating exchange rate with interventions in rare cases, and 36 countries practice the formation of the national currency rate based solely on the market formation of supply and demand. The absolute floating rate of the national currency is a phenomenonwhich has been fully implemented in 17 countries of the European Union. The remaining 13 countries have a 70% share of industry in exports. Only Mexico and Norway were included in the list of states practicing free floating of the national currency and specializing in oil production. The course is also actively practiced by Russia's strategic partners. These are Turkey, Brazil and India. These states have very soft currency interventions of the Central Bank. The floating exchange rate of the ruble, the consequences of which have already begun to be actively manifested, is not effective, since Russia does not tend to have a developed market for insuring foreign exchange risks. Oil-exporting countries with one specialization have different exchange rates, mostly stable and fixed.

For Positions

When looking at what a floating ruble means for Russia, it's worth saying that the situation simply does not hold water. The Central Bank does not fulfill its obligations under the law, as a result, quotes travel a significant distance every day. The advantage for the financial structure is that it does not have to spend its gold reserves on playing with speculators. It overlooks the fact that speculators thrive even in high volatility. The place of the most influential market player represented by the Central Bank has already been taken by major experts with foreign exchange earnings, who own 72% of the cash flow. What threatens the floating exchange rate of the ruble for the country and its population in the future, it is very problematic to say, because everything depends to a greater extent on the actions or inaction of the Central Bank.

Wrong ideas

The meaning of the floating exchange rate of the ruble and how useful it is for Russia is told in higher educational institutions, despite the fact that all the information provided is erroneous. One of the textbooks on economics provides the following data: “A floating exchange rate in the face of a deficit in the country's balance of payments will be compared with a deficit, which will undeniably lead to a reduction in the inflow of dollars into the territory of the state. The value of the national currency will be systematically lowered, as a result - a decrease in the cost of domestic goods, their popularization in the domestic market and an increase in exports. Further, the growth of exports will increase the inflow of dollars, and the demand for foreign currency will fall, the ruble will rise.” To some extent, this is correct, but when considering this issue, it should be taken into account that the rule is relevant for states that supply goods, the cost of which is formed solely from the costs of the domestic market. It will be easier to explain what the floating exchange rate of the ruble threatens, given that 72% of the state's exports consist of oil and gas, and the cost of energy carriers is formed exclusively on the international market. As a result, the “free floating of the ruble” cannot lead either to an increase in the national currency or to an increase in exports. In order to channel the benefits of this monetary policy in its favor, Russia should have diversified exports by product range, and not by partner countries, which is now being actively done under the pretext of diversification.

What to expect in the future?

Floating exchange rate of the ruble,the consequences of which are still unknown, opens up opportunities for the Central Bank in terms of intervention. At the same time, the IMF standards clearly state that the Central Bank has the right to carry out interventions no more than 3 times within 6 months, while their duration should not exceed 3 days. By strict regulation, the stability of the national currency will be kept to a minimum.

The Central Bank of Russia is actively applying interest rate changes to regulate the money supply. The strengthening of the currency is carried out by reducing its quantity, which leads to the formation of high liquidity risks and hinders the economic growth of the state. Credits are growing, becoming an inaccessible source of investment for economic sectors. Considering the question of what the floating exchange rate of the ruble means, we can safely say that the phenomenon, in fact, as well as the depreciation of the exchange rate itself, are the consequences of the Central Bank's policy. The consequences are currency jumps in the market and aggressive speculative sentiment.