Russian Rubble Essay

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Case Study: The Russian Ruble Crisis of 1998 1991 marks the breakup of the former Soviet Union and be beginning of new financial difficulties for Russia. Throughout the 1990s, Russian government spending exceeded their tax revenues, resulting in an increasing federal deficit. The deficit was financed by borrowings and by the printing of more currency, the ruble. In spite of these difficulties, the stability of the Russian ruble during the early 1990s was seen as a major success of the Russian Government. During this time, the currency, the ruble, operated under a managed float. Under this exchange rate regime, the Russian government had established a range (trading band) within which they would let the currency float. For example, throughout 1996, 1997 and the first half of 1998, the trading band had been constantly adjusted, with the government allowing the band to slide daily at a 1.5% monthly rate. Each day, the Central Bank of Russia would announce an official exchange rate for the day (the rate at which they were willing to buy and sell the ruble), with the rates always within the official band. If the rate moved above or below the announced band, the Central Bank would intervene on its behalf. From 1995 to 1998, Russian borrowers – both government and non-governmental – had borrowed large amounts in international capital markets. This external debt, which denominated in U.S. dollars and was estimated at $160 billion by 1998, required U.S. dollars for interest and principal repayments. Unfortunately, the U.S. dollars that Russia was earning on its trade and current account surpluses were leaving the country in the form of capital flight and thus were not available to service this growing external debt. In addition, a global fall in commodity prices, adversely affected Russia’s dollar earnings on exports of oil, timber, and gold. Sensing that

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