Mini-Case #2 Russian Ruble Roulette
1.) We believe that there was a multitude of exchange rate regime classifications employed in Russia during the 1991-2014 timeframe. Initially during the 1991-1998 timeframe Russia employed a fixed peg of the Ruble against the USD. This was in an effort to combat the hyperinflation and high inflation experienced in the early to mid 1990’s. This regime was in place up until the economic crisis of 1998 that prompted Russia to shift toward a more heavily managed float regime. The predominant exchange rate regime that has existed in Russia from the height of the economic crisis in late 2008 early 2009 has been a managed float within two crawling pegs system. In this system, Russia’s Central Bank allowed for the Ruble to float within predetermined upper and lower exchange rate bands against its basket of foreign currency reserves (as indicated in the text of 55% USD and 45% EUR). The bank established a “neutral zone” in which there would be no intervention in the FX markets unless crossed.
Lastly, in an effort to transition the Ruble into a freely floating currency, like that of the USD and EUR, Russia’s Central Bank has slowly been letting the crawling peg gap widen, effectively increasing the “neutral zone” and allowing the Ruble to shift more freely with macroeconomic forces. Our view of the exchange rate regime of the Ruble during the 24-year timeframe is transitory in nature, starting with fixed peg and moving through various degrees of managed floating rates and ending with nearly independent floating rate.
2.) The establishment of the operational bands provided Ruble speculators with effective price ceilings and floors for the Ruble. Speculators could therefor expect that the Russian Central Bank wouldn’t allow the Ruble to appreciate below the lower band or depreciate past the upper band. In our opinion we believe that this had a destabilizing effect, despite that...