Studying the question “what is the dual-currency basket?”, Let's start with the fact that the concept is a peculiar reference point for the Central Bank of the Russian Federation. The main purpose of the basket is to determine the priority of world currencies. On the basis of statistical indicators, the actual exchange rate of the ruble is formed. Dual currency basket gives a guideline in establishing the value of the ruble or any other monetary unit based on the value of two major currencies of the world: the dollar and the euro.
The specifics of the currency basket
Considering what the dual-currency basket is, let's look at the concept of its course. It can change in one day. Basket indicators directly affect the formation of a currency corridor. Dual currency basket of the Central Bank of Russia was not formed immediately. For a long period of time, the national currency of Russia was pegged solely to the dollar. The situation took place before the moment when the active stage of development of the European Union began, which automatically led to a weakening of the dollar. Since 2005, the Russian government has adopted a currency basket as a currency benchmark. The main goal pursued by this decision was to limit the impact of US dollar jumps on the ruble.
Changing the basket structure
The structure of the bi-currency basket as the economic situation in the world changed systematically. At the first stages of the existence of the basket, the ratio of 0.1 euro and 0.9 dollars per ruble was generally accepted. The dollar had the status of a priority currency. The demand for it was much greater than for the European currency. After two years, the structure of the basket has undergone fundamental changes. A rate of 0.45 euros and 0.55 dollars for one ruble was adopted. Employees of the Central Bank of the Russian Federation specifically set this rate in order to limit the growth of the European currency and prevent the dollar from falling. In 2007, financial instability reigned on the international economic market. For the country, there were big risks of rising inflation. To avoid problems, the Russian government decided to grant complete freedom to its national currency, setting local maxima and minima, which automatically formed a corridor.
The dynamics of the basket and corridor
Changes in the currency basket and the corridor are phenomena characteristic of Russia. Under unfavorable situation in the country, their indicators can change significantly. You can say about the existence of some laws. If the national currency is sharply cheaper, the upper limits of the corridor are shifted. If the situation is reversed, the lower bounds change. The foreign exchange reserves of Russia had a significant impact on the currency basket. The basket plays an important role in shaping the ruble exchange rate not only during periods of stability, it is responsible for containing the overall balance of the national currency. This approach allows you to adjust the level of inflation, does not allow the ruble to rise sharply. If the growth of the ruble does begin, its influence on the economy is noticeable through an increase in the cost of export products, which can lead to a sharp reduction in export volumes. It is not excluded a reduction in the flow of funds into the budget. At the moment, the share of the dollar in the currency basket significantly exceeds the share of the euro, but experts do not stop insisting that the situation may soon change.
The statistical size of the currency basket indicates the stability of the ruble. Today we can observe the exact opposite situation. The cost of the basket is calculated using the following formula:
The percentage of euros in the basket x euro rate of the Central Bank + the percentage of dollars in the basket x dollar rate of the Central Bank = cost of the basket.
For quite a long period of time, the value of the currency basket was varied in the range from 30 rubles to 33. It cost the government a significant amount of gold reserves. Had systematically pour into the market to artificially support the exchange rate. When the situation became critical and the government has been unable to adjust the rate of the national currency, the decision was made to implement a soft devaluation, which led to the appreciation of the basket.
Currency basket of the Russian Federation today
According to trades on March 6, 2015, the two-currency basket of the Central Bank of the Russian Federation stopped at a cost of 63 rubles. The technical expansion of the corridor is carried out systematically, starting from the moment of reduction in the price of oil on the world oil market and during an active military conflict on the territory of Ukraine. The limits are so modified in comparison with the figures of past years, that we can safely say that the ruble has been sent to float freely. The weakening of the currency has opened up certain prospects for the state. This is primarily a saving of reserve funds.
The dual policy of the Central Bank of the Russian Federation
Despite the fact that the dual currency basket was originally intended to stabilize the national currency and the economy as a whole, the Russian government was not keen to tie the ruble to the dual currency basket. Since 2005, the ratio of the dollar and the euro in the basket has changed systematically. From a primary proportion of 0.1 euro and 0.9 dollars, the ratio changed to 0.45 euro and 0.55 dollar. The government has created a range in which the ruble exchange rate remains acceptable to the state’s economy. The corridor allowed by buying and selling currencies to exercise control over the ruble exchange rate. In the foreign exchange market, the maintenance of the ruble exchange rate within the framework of the established corridor was carried out as a result of interventions.
The basket in the Russian economy
What is the dual-currency basket in the Russian economy is quite easy to understand, if we take into account the concept of a corridor. The ruble exchange rate is not fixed, but is kept within the average values. Based on international experience, it should be said that the currency corridor is practiced if the state has a significant budget deficit, rather large internal and external debt. Taking into account the introduction of the currency corridor into the financial policy of Russia in 2008, during the global crisis, one can say that starting from this point in time, the state is experiencing certain difficulties. The active growth of the two-currency basket over the past 8 months has become a bright indicator that the domestic economy is declining, and the state is unable to maintain a strong exchange rate of the national currency.
Floating and dual currency basket
Recently, the dual-currency basket, whose dynamics have become very active over the past six months, has less and less impact on the Russian economy. The transition of the government to a floating rate had not the effect that economists had expected. Strong volatility in the market greatly destabilized the situation. Given that oil prices have plummeted, and the ruble is right behind them, the situation cannot be called promising. The influence of the Central Bank on the exchange rate has been reduced due to restrictions in the aspect of conducting interventions, which are allowed in the current situation with a frequency of no more than 3 times within 6 months. While the government needed to keep the two-currency basket with all its forces at the minimum level, it completely passed the reins and stepped aside. An increase in the flexibility of the national currency did not lead to the expected result: the effectiveness of the interest rate policy did not increase, and price stability was never achieved.
The financial policy of the Central Bank of the Russian Federation in a crisis
Once considered a currency basket, almost everyone can safely say that it does not correspond to its initial values at the level of 30-33 rubles for quite a long period of time. This situation is explainable by the fact that for the last 6 months the government almost every day carried out the extension of BC. This phenomenon has exacerbated the possibility of understanding the financial policy pursued by the Central Bank. According to some international experts, such behavior by the government only reveals the attempts of the state to hide the phenomenon of devaluation of the national currency. In fact, it should be noted that during the consideration of the question of what a currency basket and how it is calculated, it is important to know about the formation of the ruble as a result of trading on the foreign exchange market of MICEX. A major player, despite the detachment remains to the Central Bank. Possessing large capital, it has the ability, in spite of the standards and legislative norms, shaping the pricing policy of the national currency. If desired, retention of the ruble could easily take place. In fact there is a neutrality that most to explain very problematic.
Rejection of the dual currency basket: myth or reality
Based on the current situation, taking into account the sanctions imposed on Russia by the West, the following predictions can be made. Most likely, the Central Bank of the Russian Federation will have to completely abandon not only the currency basket and corridor, but also the interventions themselves. Increased intervention is possible only in that situation, if the country will be affected by aggressive external factors. The Central Bank of the Russian Federation has certain plans regarding the transition to the inflation targeting mode, which is characterized by the existence of a target for consumer price increases, which will be influenced by the bank itself. Monetary policy in this situation will be implemented solely by changing interest rates. Targets regarding the exchange rate itself will be eliminated. The formation of the course will take place exclusively on the basis of supply and demand.