http://money.cnn.com/2014/11/07/investing/russia-currency-ruble-putin/index.html?iid=SF_E_River
The Russian Ruble has depreciated 30% to the U.S. dollar in the past year, and 10% of that was in the past week. The large drop in the last week was caused by the Russian central bank stating they would reduce support for the Ruble. The drop in oil prices, the standoff with the West, and tensions with Ukraine are also all contributing to this drop. Inflation is over 8% and the central bank doesn't think this will change for the better anytime soon.
This really hurts Russian consumers since their dollar has depreciated they can no longer consume as many imports, or repay debts in foreign currencies. There is also high inflation which means prices are rising domestically as well. This will lead to lower consumption and a lower GDP overall. I don't think now was the proper time for the Russian central bank to say they would support the Ruble less so it could be traded more freely. With the other political issues happening in Russia already causing uncertainty, announcing that they would support their own currency less was bound to make it worse. In a time when there is much uncertainty in the economy the central bank needs to be the voice of reason and try to keep expectations positive.
Russia could increase government spending. This will decrease saving, reduce supply of money, but will appreciate Ruble. The net export will decrease, meaning that people can consume more imported goods, repay debts in foreign currencies.
ReplyDeleteThis is a good example of how certain events can cause spiraling effects in the economy (mainly in the relation between prices, consumption, and GDP). This isn't unexpected, as the Ruble has been losing strength for the past several months.
ReplyDeleteIt seems that monetary policy alone will not be enough to stabilize the Ruble. The Central Bank in Russia will likely raise interest rates again but the author doubts this will be enough to stop the depreciation. If the Ruble does not stabilize soon, Russia may be facing an economic downturn in addition to their military conflicts. A war may help prevent this downturn, however, because government spending would have to increase to finance the war.
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