Just over a year ago, the Bank of Russia unpegged itself from a dual currency soft-peg, ending its dependence on the US dollar and the European Central Bank-backed euro. Under the peg, the the Bank propped up the rubble when exchange rates against the euro or dollar exceeded its boundaries. In its announcement, the Bank of Russia said that exchange rates would be determined by market factors, making for greater efficiency in monetary policy, and ensuring price stability. The question is, a year out at their goal of a free floating ruble in 2015, has it done Russia more harm or good?
Not Totally Free Floating
Let’s start with the fact that Russia never truly achieved its goal of a free floating ruble. While the nation states they haven’t given up on the idea, seven months after announcing its untethering, the Bank of Russia and officials as far up as Putin started buying up foreign currency again, including heavy investment in the US dollar.
With the Russian economy already hurting from lower oil prices, the extended period of volatility pushed the exchange rate into a cycle of negative feedback, with depreciation dropping even lower than its 46% decrease in 2014. Even with the Bank buying the dollar back up, boosting Russia’s reserves to the desired $500 billion could take up to seven years, a matter that doesn’t seem to have Russian officials giving up on the short-term hopes of a free floating ruble.
An Economy In Crisis
Russia’s decision to unshackle the ruble has not only not fully worked, it’s still managed to create some big economic problems within the nation. Inflation is at a 13 year high, the nation is projected to see a visible increase in poverty and workers are already seeing their salaries and hours cut prompting a decrease in domestic spending.
The ruble was unable to stabilize even as Russia butchered itself to keep its goals progressing forward, leading to a drop against both the US dollar and the euro, even as the euro sank during the midst of the Greek debt crisis. The matter only fed into itself as the budget then destabilized in an effort to make up for the declining sectors, and foreign investment continued to decline, a crisis already in full swing after Russia’s conflicts in Crimea.
So has the free floating ruble helped Russia reach its goal of efficiency and stability. The answer is patently no on both accounts, and Russia seems to know that. After all, that’s what prompted the Bank’s return to buying foreign currency. That doesn’t mean that the Russian market can’t stabilize, though. Oil prices may be lower, but they’re maintaining. A cheap ruble is profitable for exporters, too, meaning that for the time being there’s some foreign interest in Russian raw material.
Internal statements seem to encourage a cooler-heads perspective, too, talking about the competitiveness and purchasing power of the currency as a primary concern. While there’s some debate as to what that really entails, Russia isn’t necessarily outright doomed, even if the hope of a truly free floating ruble might be.