Financial Crisis, Contagion, and Containment by Desai Padma

Author:Desai, Padma
Language: eng
Format: epub, pdf
Publisher: Princeton University Press
Published: 2014-03-14T16:00:00+00:00

Block 5

The Ruble: Premature Capital Account Convertibility

THE RUBLE THAT traded at 6 rubles for a dollar in the first half of 1998 exchanged for 26 to 28 rubles toward the end of 1999. What went wrong?

The Background

The ruble’s course spanned two phases: the first one from 1992 to August 17, 1998, when it was sharply devalued, witnessed its liberalization from a variety of exchange controls operated by the Central Bank of Russia. Some exchange controls were restored subsequently. The rules governing current account transactions for exporters and importers were simplified and relaxed gradually in the first phase.

Current Account Transactions

Foreign exchange auctions, which appeared in Moscow in early 1991, provided dollar sources for importers and sales outlets for exporters. The Moscow Interbank Currency Exchange (MICEX) began trading the dollar once a week on January 8, 1991. Initially, a few banks participated with small offerings and the central bank operated with substantial intervention. The resulting interbank exchange rate, hardly a market rate of exchange, was influenced by enterprises’ limited access to the auctions, central bank restrictions, and its intervention in the auctions. Despite these limitations, the proliferating currency exchanges opened alternatives for exporters and importers. Having carried out the mandatory surrender of 50 percent of foreign exchange earnings to the central bank at a less than favorable rate, exporters could sell their remaining holdings on the MICEX, or spend them on imports, or deposit them, as required by law, in their resident bank accounts. Importers could buy foreign exchange at the market rate from the MICEX, or at a subsidized rate from the central bank for importing essential items.

A major change in these arrangements was introduced by the government of acting Prime Minister Yegor Gaidar when, on July 1, 1992, it enacted measures to unify the exchange rate for current account transactions. Furthermore, the exchange rate of the ruble in terms of the dollar was allowed to vary and followed the quotations, twice a week, of the MICEX.

Changes occurred on all fronts in 1993 and continued in 1994. From July 1, exporters were required to surrender half their export earnings directly to the market through their banks instead of to the central bank. Despite this compulsory surrender requirement, the repatriation of foreign exchange earnings continued to be a major concern of policy makers. As for imports, the exchange rate coefficients (favoring imports of essential commodities such as baby food) were abolished in 1993.

Thus, a flexible, current-account-convertible and unified exchange rate was in place in Russia at the start of 1994. The managed float (until July 1, 1995) and the crawling corridor regimes thereafter operated under selective convertibility of the ruble: exporters could keep foreign exchange abroad in specified amounts with the permission of the central bank bringing home the rest and converting it into rubles.

Capital account transactions for residents and nonresidents, individuals and corporate entities, were relaxed gradually and selectively.

Arrangements with Regard to Capital Account Transactions

Russian citizens were allowed to open foreign exchange accounts and deposit foreign exchange (which they could buy from authorized foreign exchange bureaus operating in large cities) in resident banks.

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