The History of the Bank of Russia's Exchange Rate Policy

Abstract

During the post-Soviet period of 1992-98, the monetary policy of the Bank of Russia was essentially exchange rate-oriented due to overall economic and financial instability combined with hyperinflation (1992-94) and high inflation (1995-98). An exchange rate corridor system was introduced in 1995. The government debt crisis of 1998 triggered a shift to a managed floating exchange rate. After that crisis, exchange rate dynamics were largely market-driven. The exchange rate continued to be tightly managed through 2002-05. In 2004, less restrictive capital control regulations were adopted, marking a move from an authorization-based system to flow controls. The rouble experienced steady upward pressure and the Bank of Russia intervened repeatedly in the foreign exchange market to contain the rouble's appreciation. In 2005, the Bank of Russia introduced a dual-currency basket as the operational indicator for it exchange rate policy, again to smooth the volatility of the rouble's exchange rate vis-a-vis other major currencies. Following the global financial crisis, the Bank of Russia changed its policy focus towards moderating the rouble's depreciation. Interest rates were steadily raised, and a range of control measures was implemented. During 2009-12, the Bank of Russia further increased the flexibility of its exchange rate policy. Intervention volumes have steadily decreased. The overall scale of the exchange rate pass-through in the Russian economy has diminished in recent years. Greater flexibility on exchange rates has also let the Bank of Russia put increased emphasis on its interest rate policy. In 2013-14, the Bank of Russia plans to further increase the flexibility of the rouble exchange rate regime with a view to creating the conditions for a transition to a fully floating exchange rate regime by 2015.

Full publication: Market Volatility and Foreign Exchange Intervention in EMEs: What Has Changed?

Keywords: Bank of Russia, rouble, foreign exchange market, exchange rate policy, exchange rate regime

JEL Classification: E58