The floating ruble exchange rate is a complete refusal by the state power of the Russian Federation of 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 have successfully practiced this policy format in relation to their currency. A more common economic regime is a regulated exchange rate.
The specifics of the floating ruble and fixed rate
The transition to a floating ruble exchange rate means stopping the use of a single currency corridor, within which the value of the national currency varies within a clearly defined framework. Upon reaching the upper limit or lower, monetary forces activate their forces, which are directed to stabilize the course. Intervention in most cases takes place in the format of interventions. On the open market, conversion-type operations with a national currency and reserve signs are actively implemented.
Until the adoption of the floating rate at the Bretton Woods Agreement in 1944, the fixed exchange rate system determined the obligations of the Central banks, independently setting their own currency, to take full responsibility to change foreign money in accordance with the accepted quotes.
The disadvantages of a fixed course system
Floating exchange rates were legalized in 1944, after obvious flaws in the fixed rate were noticed. The main disadvantage is the tight boundaries in the aspect of the development of the domestic economy of the state and the tight framework for entering the world stage. The second obvious drawback of politics is the bias of quotes in relation to each other. This has a direct relationship with the specifics of the individual development of each state. Thus, one country may experience severe economic difficulties, while another country will be characterized by strong and sound financial health. Such an imbalance will lead to the fact that a flourishing country will face a number of problems due to the unfavorable situation in the territory of another state.
Disadvantages of a floating rate
In turn, the floating rate system, 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. The sharp imprint of exchange rates imposes a negative imprint only on export-import operations of the international market.
Floating course in Russia
For the first time, the regulated currency regime was initiated in Russia since 1999. The decision was made in connection with the default, which took place in 1998. After adverse events in society, the Russian government was able to eliminate the negative effects of the external economy on the national financial sector. Already in 2005, such a concept as a dual-currency basket was introduced, in which the tandem of the dollar and the euro was used. She opened up broad prospects for the regulation of the country's currency. After the ruble was tied to the two strongest monetary units in the world, the orientation toward the US economy exclusively instantly weakened.
Until 2009, government authorities actively intervened in the quotes of the foreign exchange market only if 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 its borders.
History tour
For the first time, at that time, Deputy Chairman of the Central Bank of the Russian Federation Ulyukaev spoke in 2005 about the transition of Russia to a floating rate. He proposed the transition to this type of policy from 2010 to 2015. At that time, the rationality of the policy change was explained by the need to weaken the ruble due to a sharp increase in export revenue. The decision was considered in completely uncharacteristic for the present moment economic conditions. This is financial stability, the high cost of oil, and the stability of the exchange rate, and a favorable balance of payments.
Why did the floating rate program not pay off?
The floating ruble exchange rate 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 in comparison with 2005: sanction pressure, a drop in the cost of “black gold”, a recession in the economy, the effect of government actions turned out to be the opposite. The ruble weakened against the dollar and showed unprecedented volatility. At that time, when only the active policy of the Central Bank of Russia could rectify the situation, on the contrary, he made a decision on his self-removal and actively adheres to his position. It is problematic to say what the floating ruble exchange rate means for Russia, since the effect of its implementation has not been achieved.
Floating rate and economic instability
The floating ruble exchange rate 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. It is interesting that the advice of the best "world experts" who advise the government of the state is very different today. In particular, according to a representative of Investbank, the floating rate regime is absolutely unacceptable due to 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 rate, the country is not yet ready for this. Fears are associated with 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 substantial losses. As world practice has shown, the floating ruble exchange rate is a monetary policy that can only manifest itself effectively in states where the economy is developing rapidly, and industry is in its prime. The main export item should belong to production.
Floating course in the world
The floating rate regime is set in only 34% of the countries of the world. The indicator includes 65 countries, of which 29 practice floating exchange rate with interventions in rare cases, and 36 states practice the formation of the national currency exchange rate based solely on the market formation of demand and supply. The absolute floating rate of the national currency is a phenomenon that has been fully realized in 17 countries of the European Union. The remaining 13 countries are characterized by 70% of the share of industry in exports. Only Mexico and Norway were included in the list of states practicing freestyle swimming of the national currency and specializing in oil production. The course is actively practiced by strategic partners of Russia. These are Turkey, Brazil and India. These states have very soft currency interventions by the Central Bank. The floating ruble exchange rate, the consequences of which have already begun to manifest itself, is not effective, since Russia does not have a developed market for insurance of foreign exchange risks. Oil-exporting countries with one specialization have different exchange rates, mostly stable and fixed.
Pro Positions
Considering the question of what the floating ruble exchange rate means for Russia, it is worth saying that the situation simply does not stand up to criticism. The Central Bank does not fulfill its obligations defined by law; as a result, quotes travel a considerable distance daily. The plus for the financial structure is that it does not have to spend its gold reserves on the game with speculators. The fact that speculators feel great even under conditions of strong volatility is overlooked. The place of the most influential market player in the person of the Central Bank today has already been taken by large experts with foreign exchange earnings, who own 72% of the cash flow. What threatens the floating ruble exchange rate for the country and its population in the future is very problematic to say, because it increasingly depends on the actions or inaction of the Central Bank.
Erroneous ideas
What the floating ruble exchange rate means and how useful it is for Russia is described in higher education institutions, despite the fact that all the information provided is erroneous. In one of the textbooks on economics, the following data is provided: “A floating rate in the conditions of a lack of a balance of payments of the country will be compared with a deficit, which will undoubtedly lead to a reduction in the influx of dollars into the territory of the state. The value of the national currency will systematically fall, as a result - a decrease in the cost of domestic goods, their popularization in the domestic market and an increase in exports. Further, export growth will increase the influx of dollars, and the demand for foreign currency will fall, the ruble will rise. ” To some extent this is correct, but, considering this issue, it must be taken into account that the rule is relevant for states that supply goods whose prime cost is formed solely from the costs of the domestic market. It will be easier to explain what the floating ruble exchange rate threatens , given that 72% of the state’s export consists of oil and gas, and the cost of energy is generated exclusively on the international market. As a result, “free floating of the ruble” cannot lead to either an increase in the national currency rate or an increase in export volumes. In order to channel the advantages of this monetary policy in its direction, Russia had to diversify its exports according to commodity nomenclature, and not according to partner countries, which is now being actively done under the pretext of diversification.
What to expect in the future?
The floating ruble exchange rate, the consequences of which are still unknown, opens up opportunities for the Central Bank in terms of interventions. Moreover, the IMF standards clearly state that the Central Bank has the right to intervene no more than 3 times within 6 months, while their duration should not be more than 3 days. By tight regulation, the stability of the national currency can be kept to a minimum.
The Central Bank of Russia is actively applying interest rate changes to regulate the money supply. Currency strengthening is carried out by reducing its quantity, which leads to the formation of high liquidity risks and hinders the economic growth of the state. Loans 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, is the consequence of the Central Bank’s policy. The consequences are currency surges in the market and aggressive speculative sentiment.