Ruble Against Dollar Between 1992 and 1998

Subject: Economics
Pages: 1
Words: 255
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As the case-study of Russian Rubble Crisis suggests ‘with inflation rising, the ruble tumbled in the value against the dollar and other major currencies’. In January 1992 the exchange rate rest at $1+R125 and in the following years it had being declining until default in 1998. In 1996 Russian government decided to borrow IMF loan in foreign currency with the purpose to use it for stabilization of national currency. Russian government agreed with IMF conditionality such as decreasing budget expenditures, rising discount rate and increasing taxes. Notwithstanding the fact of this partial improvement that situation in public sector was worsening with increase of government expenditures which generated inflation.

These examples show that there exist the direct relationship between exchange rate (in this case ruble rate against dollar) and the level of inflation. Exchange rate is based on the Purchase Power Parity which deeply affects currency rate against other currencies. Inflation means that money become cheaper and thus people can buy fewer goods at the same prices.

This results in immediate decline of currency rate of ruble against stable currency such as dollar. In its turn this decline considerably affects the foreign currency reserves as Russian National Bank buys less dollars and other currencies on rubles. As current mortgage crisis in the United States showed that printing more money leads to declined of currency rate as we can see on example of dollar decline against euro and ruble. Hence, Russian government ruble printing in mid-90s worsened inflation rates immensely.