Nearly every government deals with national currency fluctuations. The European Union is currently concerned about the weakening of the dollar and, consequently, the stronger euro. Friction is common between the monetary authorities of Old Europe and the United States as Washington continues to devalue the world's reserve currency. A strong euro negatively affects Europe's export-oriented economy; in the third quarter of 2004, economic growth rates in Europe were the lowest for the year. However, the European Central Bank has refrained from a currency intervention to bolster the dollar.
The Russian monetary authorities are pursuing a different policy - they want to prevent the excessive strengthening of the ruble. Deputy Prime Minister Alexander Zhukov said Russia's exchange rate policy in the next few years would be focused on preventing the ruble's exchange rate exceeding labor productivity growth rates. According to Alexei Ulyukayev, first deputy chairman of the Central Bank, the real effective exchange rate of the ruble in 2004 is expected to increase by slightly over 6%, and up to 8% in 2005. Consequently, despite the dollar weakening in the world, in Russia the dollar is relatively stable.
It would be difficult to find a simple answer to whether a stronger ruble is good or bad for the country's economy.
According to Economic Development and Trade Minister German Gref, the strengthening of the real exchange rate of the ruble is good because it increases the incomes of the population. On the other hand, it is a negative factor for the development of industry.
In general, exporters and producers oriented to the domestic market are interested in a weaker ruble, which protects them from foreign rivals. A stronger ruble would slow down Russia's economic growth because exports would become more expensive on foreign markets and therefore less attractive to consumers. The United States' currency policy is an example of this because the country is recovering from a crisis by gradually weakening the dollar. The US is doing this despite the fact that the American economy is the strongest in the world. According to Ivan Grachev, member of the State Duma's commission for sustainable development, a stronger ruble is harmful because it increases imports and, therefore, hurts domestic enterprises.
On the other hand, by containing the ruble, the government and the Central Bank create an artificial barrier to international competition, which prevents Russian companies from increasing their competitiveness. Therefore, artificial restraints on the national currency prevents companies from raising their efficiency. An undervalued ruble also has a negative effect on Russia's ability to repay its foreign debts and increases the portion of budget expenditures used to service foreign debt, thus reducing resources to finance the national economy. This shackles domestic demand, which certainly does not benefit Russian manufacturers. Finally, a stronger ruble has a great social effect, as it is viewed by the majority of Russians as proof that the Russian economy has stabilized.
It should not be forgotten why the ruble is getting stronger - soaring oil prices. In the foreseeable future, oil prices will go down and the flow of petrodollars will slow, which will stop the strengthening of the ruble. In Grachev's opinion, this possibility is realistic because there are no grounds for the ruble to strengthen either in industry or labor productivity.
The Central Bank currently serves as the regulator of the Russian economy. The need to combat inflation and service the foreign debt made stabilizing the financial sector the top priority of Russia's economic policy in the 1990s. Today, the tremendous increase in the money supply from high oil prices places the monetary authorities' position to the fore once again. However, at the current stage, after many crisis phenomena in the Russian economy have been overcome (due to efficient credit and monetary policy), the development of industrial policy should also become a priority in order to achieve real economic growth in Russia. Structural investments in the real sector of the economy and the growth of industrial manufacturing will facilitate the growth of the domestic goods market, will help reduce prices and achieve positive social results. This, in turn, will help the country raise its GDP, combat poverty and make the ruble truly strong.
