Recent events in our country have made many citizens think about what to do with their savings and how not to be in the red in the event of a possible devaluation of the national currency. The ruble is weakening. It is completely useless to deny it. But what determines the exchange rate? There are so many decisive factors. And what determines the exchange rate of the dollar to the ruble? What is the relationship between these currencies?
The ruble as the national currency of Russia
It is difficult to understand what the exchange rate depends on, without knowing what exactly affects the rate of your national currency. The ruble came to us from ancient times. But over time, the reasons for its strengthening and weakening have not changed at all. First of all, the trade balance affects the exchange rate. That is, the ratio of the amount of produced imports in relation to exports. This means that the more this ratio tends to zero, the less prerequisites there will be for concern. After all, if, for example, exports significantly exceed imports, then this can lead to a lack of competition and a decrease in the level of exports themselves. And if imports take a leading position, then this can lead to a sharp decrease in the amount of foreign currency in the country, which will lead to a decrease in the value of the domestic currency. Which, in principle, can be observed today in Russia. In general, not only this leads the ruble to an imbalance. There are many factors that can affect its growth or fall: geopolitics, inflation, GDP, unemployment, countries and other reasons.
The dollar as a world currency
After the Second World War was over, the United States secured the title of superpower. The American dollar poured into Europe, and this was the reason for its becoming a reserve status currency. The dollar has risen significantly today. But it also has weaknesses: there are some factors that can affect its value. First of all, of course, this is the demand for the dollar in other countries. But it is also very important how this monetary unit develops within its country. After all, there are some factors that the United States uses specifically to increase the exchange rate of the national currency. First of all, these include GDP growth, economic development, and the number of unemployed. Often, the banking system within the country can also affect the growth of the dollar. Interest rates and dividends can be controlled by applying special programs and measures. It is difficult to say what determines the exchange rate to a greater extent. Each factor plays its own role.
Why is the dollar exchange rate higher than the ruble?
Russia is a very powerful state, but why is the dollar more expensive? And what determines the exchange rate of the dollar to the ruble? The ruble has not always been cheaper than the dollar. But recently this trend has simply taken root in Russia. For several decades, the dollar has been worth significantly more than the ruble. It is quite easy to explain this pattern. Prior to the abolition of the gold standard, the value of each currency was confirmed by the gold reserves of its state. Money differed only in weight, shape, design and quality of the metal. But after the abolition of the standard, various factors began to put pressure on each monetary unit. They later began to determine its value in relation to other currencies. There is not enough gold for everyone, and this is a fact. Therefore, most countries try not to issue more money than the goods produced in the country. This is done in order to avoid an economic crisis. The conclusion follows from this: the currency of the country that produces the most goods will occupy a leading position throughout the world. Today this country is America.
Exchange Rates. Interest rates
What determines the exchange rate? In order to answer this question more fully, it is necessary to have knowledge in the field of financing. But if we speak in simpler terms, then we get such a scheme. All states use interest rates to conduct their own monetary policy and control the exchange rate. As you know, the size of this interest rate is always influenced by several factors: the level of inflation, government policy, the demand for a certain currency. Among the most influential factors are the following: relative interest rates, purchasing power parity, economic conditions, demand for and supply of capital. Together, all these reasons will form one or another cost of buying and selling each monetary unit. What determines the level of the exchange rate? Perhaps it depends on how all these factors will develop.
Why is the course moving?
Why do exchange rates move? As mentioned earlier, trade relations have a certain influence on each of them. Also, the exchange rate depends on exports and imports. As national incomes rise, so does the demand for imported goods. This, of course, leads the national currency to low positions. This factor is called "purchasing power parity". Another important factor that affects the direction of capital movement is currency speculation. In most cases, this is due to the desire of investors to have more profitable transactions by increasing the price of foreign currency. Consequently, such actions lead to the movement of capital from one country to another, which negatively affects the financial market. This phenomenon is called "capital flight". The consequences of this factor can be quite negative, for example, lead to a sharp jump in rates, and possibly to a real crisis. Why is the exchange rate moving? The long-term trend of the movement of rates is significantly influenced by various kinds of funds. After all, the main activity of these organizations is investment. If we take into account the amounts that the funds have, it becomes clear how these investments can affect the exchange rate. For example, make it move in one direction for quite a long time. And of course, one cannot fail to note the influence of the state on the exchange rate with the help of banks. As well as the activities of importers and exporters.
Forex market
Recently, many have begun to resort to making money with the help of the Forex market. And at the same time, the question of what determines the exchange rates at Forex began to arise more and more often. The most important drivers of currencies in this market are two factors: exports and imports, as well as capital activity. Whatever you say, everything that concerns the currency and its value depends solely on trade relations between countries. After all, the higher the cost of goods produced in one's own country, the more expensive the currency will be. Well, enough has already been said about the activity of capital above. It is very important to note that the Forex market is for people who simply want to exchange one currency for another in order to use it. But today, most of the participants in this market are speculators who profit from the movement of the stock price. At the same time, they can use even small fluctuations in exchange rates for their speculation.
"Black gold" and currency fluctuations
What determines the exchange rate? As mentioned earlier, many factors play a role in shaping the value of each monetary unit. But the most noticeable influence on exchange rate fluctuations is exerted by the price of oil. This is especially reflected in the dollar equivalent. Recently, the United States has significantly increased the amount of extracted energy resources. In this regard, the price of oil was lowered from (to $50-60 per barrel). And this, first of all, had a negative impact on the state of the economy of many countries. Including Russia, which today is struggling with the problem of the fall of the national currency. Previously, when US oil consumption was at a high level, and the “shale revolution” had not yet swept the world, the dollar exchange rate reacted negatively to rising oil prices. Today the situation has changed dramatically.
World currencies and the dollar
The year 2014 was not an easy one for the financial market. And this affected not only Russia, but also a number of other countries. For example, by the end of the year, the dollar strengthened by 11% against the euro. The yen is in an even more difficult situation, the level of strengthening of the dollar amounted to 12%. Of course, the result of Russia is difficult to equate to the losses of these countries, because the ruble has fallen by almost 45% in a year! And the results of the virtual currency (bitcoin) have completely fallen to the bottom. Compared to November 2013, bitcoins have fallen in price against dollars by as much as 72%. Such currencies as the Indian rupee and the Chinese yuan suffered minimal losses this year. This behavior of currencies, first of all, is connected precisely with the fall in prices for "black gold".
Those unpredictable exchange rates!
The Forex market can often provide novice clients with useful information on how to predict currency rates. First of all, according to experts, it is necessary to follow all the events in the world of politics and economics. And also be sure to carefully consider the forecasts of leading analysts for the near future. Of course, in no case can one completely rely on someone else's opinion, but it is still necessary to listen. In order to try to predict the exchange rate for the near future, it is necessary to take into account interest rate parity, purchasing power parity and other nuances that are associated with the movement of exchange rates. Of course, not everyone is able to quickly learn all the intricacies of the financial market, but with a strong desire it is still possible!
A few months ago, oil suddenly began to become cheaper, the dollar and euro rates first crept, and a little later they jumped up, making our ruble cheap, and this was the beginning of a crisis from which Russia has not yet emerged. A cheap ruble is beneficial for the state, but not for ordinary citizens. Let's see what determines the exchange rate of the ruble against the dollar and the euro. It is no less interesting to know whether it is possible to predict a rise in price or a fall in price of the Russian currency.
Educational program for dummies
We will try to briefly and in simple words conduct an educational program, as they say, for dummies, about how the Russian ruble becomes more expensive and cheaper.
Price movements on currency exchanges only seem chaotic, in fact, the value of the ruble, dollar and euro depends on a number of circumstances that are quite man-made.
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It is possible to divide the factors on which the price of a currency in Russia depends on external and internal.
We list the reasons that externally affect the exchange rate of the ruble against the dollar:
- World oil prices- In Russia, almost everything depends on the sale of oil today. Being in fact a raw material appendage of the civilized world, our country is directly dependent on oil trades, and since the price per barrel is set in dollars, the higher it is, the higher the price of the ruble against the dollar.
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But when oil prices fall, there is a loss of profits in Russia and the devaluation of the ruble immediately follows to avoid a decrease in the ruble equivalent of revenue from oil sold.
- The value of the dollar against the currencies of other countries- if the US dollar falls in price, for example, against the euro, its price also decreases against the ruble.
Now let's look at the internal factors on which the dollar/ruble exchange rate in Russia depends:
- Demand for foreign currency- fluctuations in the value of securities in the stock market lead to an increase in demand for a stable currency, that is, the US dollar. And along with demand, the price of the dollar rises. In order to prevent the situation from developing into a crisis, the Central Bank of the Russian Federation conducts foreign exchange interventions, knocking down the excessively increased dollar exchange rate.
- Political and economic situation in Russia- the value of domestic money largely depends on the mood in the society and its trust in the authorities. In crises, the population starts to buy dollars and euros, believing that, in this way, they will protect their savings from loss, thereby provoking an increase in the price of foreign currencies and bringing down the value of the ruble.
Do not hurry!
In our review, it is important for a teapot to understand one thing: you should not immediately succumb to the whipped up hysteria and run to the exchanger to buy dollars and euros, trying to get rid of the cheaper rubles. The ongoing crisis is largely to blame for those same currency speculators who artificially inflated the price of the dollar in the wake of panicky rumors about cheaper oil.
Someone got rich dramatically, and the vast majority of the population of Russia had to tighten their belts, being broke, with a suddenly cheaper salary, with which you can buy less and less.
With a high degree of probability, it can be argued that the most important of all factors influencing the dollar on the ruble is the price of oil in the world. As you know, Russia is one of the largest oil producers in the world, respectively, the economy is very driven by this factor, and it turns out that oil is the most basic raw material in Russia. From all this it follows that if oil quotes are rapidly going up (the price of petroleum products in dollars), then the dollar exchange rate against the ruble becomes lower. In general, this is the main external factor of the dollar's influence on Russia.
In the case when oil prices go down, this has a very detrimental effect on the Russian economy and currency, since in this case Russia begins to incur huge losses and, as a result, the ruble is devalued, and this is done so that the profit from oil products for Russia does not decrease , it turns out that at this moment the dollar begins to grow rapidly against the Russian ruble.
Plus, one of the significant external factors is the dollar exchange rate against other world currencies. Let's take the euro dollar currency pair as an example, if the dollar starts to fall against the euro, then, in most cases, the dollar also starts to fall against the ruble, this happens in most cases.
Here we discussed the influence of external factors, now we come to the analysis of internal ones. The most important of all the factors (internal) influencing the quotes of the Russian ruble is how much this currency is needed in Russia, that is, the ruble is in great demand in Russia or people prefer other currencies, since keeping money in these currencies in their opinion more stable.
Here is a very vivid example for you: the ruble begins to decline, and very clearly, then, in turn, all enterprises try to transfer their money, which in turn is in shares, into a currency that is more resistant to the vagaries of the market - the dollar, of course, it happens that money is transferred and into completely different currencies, but in most cases, the choice of people falls on the dollar, since this is the most common currency in the world, and no matter what they say, it is much more stable than other currencies. It also happens vice versa, when the ruble starts to rise in price, then it is natural that the demand for the ruble starts to rise just as much, in general, I would call these actions a kind of vicious circle.
Above, I listed the most basic aspects of the influence of the dollar on Russia, there are a huge variety of different kinds of influences, but less strong, for example, what is the trade turnover between Russia and America, it is also very important that if America supplies more goods to Russia than Russia to America , then this has a very detrimental effect on the ruble quotes, now I will explain why.
The thing is that Russia needs to pay for American goods directly in dollars, it turns out that Russia needs to exchange a large number of rubles into dollars, with the risk of losing money, since currency quotes jump all the time, and I'm not just talking about ordinary goods, and if we take, for example, aircraft, cruisers, any minerals on an industrial scale - after all, this is all a lot of money, and a change in the exchange rate by at least 1/10 of the ruble can lead to a huge loss of money and, as a result, a decrease in Russian ruble quotes.
But for Russia at the moment it is very good that if the dollar falls against other currencies, mainly against the euro, then against the ruble it starts to fall in much the same way. And this happens quite often, Russia is also affected by the amount of currency that is brought in and located on the territory of Russia, since many stores and enterprises are converted to dollars, and not only customers can count with any enterprises in dollars, many enterprises they specifically exchange and keep their capital in dollars, the Russian economy suffers greatly from this.
In my opinion, every effort should be made to ensure that the entire population in Russia, or most of it, would begin to trust the ruble no less than the dollar and try to use rubles in all calculations, this would greatly change the situation on the market, since The Russian ruble, I am more than sure, under such circumstances, would begin to grow rapidly, subsequently the economy would begin to grow, and of course the standard of living, as I said, this is all quite closely interconnected, but it is only in words it is easy to do this, in reality everything much more difficult than it might seem at first glance.
Since, to face the truth, the dollar all over the world is a very significant currency that has gained great prestige, and it deservedly has the title of the most popular and most common currency, perhaps over the years something will change and the ruble will be trusted in the same way, like the dollar, but for now we need to be realistic and look at things correctly.
History of ruble crises in charts:
Speaking about the ruble exchange rate, the Bank of Russia never gives exchange rate forecasts. He cannot answer the question of how much the ruble will cost in a day, a week or a month. At the same time, the regulator largely affects how much the currency will cost. Central Bank experts explained to The Village how the exchange rate is formed, what factors influence it, what happened to the ruble last year and what is happening right now.
How the exchange rate is formed
There are different exchange rate regimes around the world, but in most countries it is determined by market processes. Somewhere Central banks interfere in the exchange rate a little more, somewhere a little less.
If the intervention of the Central Bank is minimal, the rate is called free floating. The Central Bank can manage the exchange rate through the purchase or sale of foreign currency (these are interventions). If external factors push the national currency up too much, the Central Bank accumulates its reserves in foreign currency. Conversely, when the exchange rate drops sharply, the Central Bank is forced to spend its reserves. If the negative factors are of a long-term nature, the reserves can be squandered very quickly, and as a result, the exchange rate will still not be able to be maintained.
If the Central Bank has a lot of reserves, it can generally fix the exchange rate, that is, declare that it is ready to buy and sell any amount of currency at a pre-announced rate. In this case, no one will exchange currency at a different rate, although this is not prohibited. A fixed exchange rate policy was popular in the last century, but now most countries have moved away from it.
The ruble exchange rate was rigidly fixed in 1995-1998, was flexible, but tightly controlled in 2000-2008. It was after the financial crisis of 2008, when maintaining the exchange rate of the ruble cost Russia about a third of its gold and foreign exchange reserves, that it was decided to move from the policy of managing the exchange rate to managing interest rates and targeting inflation by 2015. ( About what affects inflation, we already. - Approx. ed.).
How the ruble fell
As scheduled, by the end of 2014, the ruble began to float freely.
From that moment on, the Central Bank has neither explicit nor hidden goals for the exchange rate, and foreign exchange interventions (that is, the purchase of a large amount of currency to maintain the exchange rate) are resorted to only in cases of threats to financial stability. When and how the Central Bank's foreign exchange interventions took place, you can see.
The cancellation of the current currency corridor was announced on November 10, and in fact the Central Bank's foreign exchange interventions ceased on December 16.
On this day, the exchange rate fluctuations amounted to 27%. For comparison: at about the same time, Switzerland refused to peg the exchange rate to the euro, and the fluctuations in the franc exchange rate within one day reached 31%. The sharp depreciation of the ruble against the dollar and the euro was very painful, but it was impossible to postpone the transition to a floating exchange rate.
What happened then to the ruble exchange rate is now often called devaluation.
But strictly speaking, this is not the case. Devaluation is a planned and controlled decrease in the exchange rate by the Central Bank in a controlled manner. This has happened twice in the recent history of Russia. The first time - in August 1998, the second - during the global financial crisis in 2008, when the Central Bank pursued a policy of gradual devaluation with the help of massive interventions.
What factors influenced the ruble exchange rate
The ruble has been under unprecedented pressure since February-March 2014. The difficult geopolitical situation and the introduction of financial sanctions have led to an increase in the risk premium when investing in Russian assets. All this, together with the negative mood of investors, increased the pressure on the ruble exchange rate. The situation was stabilized in March only thanks to massive foreign exchange interventions, that is, at the cost of a significant reduction in Russian gold and foreign exchange reserves.
It was possible to stabilize the situation in March only thanks to massive foreign exchange interventions, that is, at the cost of a significant reduction Russian gold and foreign exchange reserves.
In the future, a steady downward trend in oil prices was added to the negative factors, and by the end of the year, the peak period of payments on external debts approached. All this caused an even greater depreciation of the ruble and created panic about the exchange rate and inflation. They were fueled by expectations of lower investment ratings for Russia and Russian companies, fears of introducing capital controls, and so on. Against this background, the rate fell to a level that was significantly below the fundamentally justified, or, in other words, determined by oil prices.
In December, the Bank of Russia partially compensated for the deteriorating situation with a sharp (first to 10.5%, then to 17%) increase in the key rate and a reduction to a minimum of interest rates on operations providing foreign exchange liquidity on a repayable basis. Simply put, if the Central Bank used to sell foreign currency, now it lends it.
How the ruble grew
After the dramatic period of late 2014 - early 2015 was over, the ruble exchange rate stabilized at a new equilibrium point. This happened for several reasons:
Oil prices have stopped falling and even rose by a third from the minimum level in 2014.
Fears of imposing restrictions on the movement of capital by the Russian authorities have gone, a round of downgrades of Russian country and corporate ratings has calmly passed.
There is almost no bad news in terms of foreign policy.
The policy of the Central Bank to provide liquidity (currency REPO auctions) has reduced the value of the currency for Russian borrowers.
The inevitable slowdown in the Russian economy turned out to be significantly lower than experts' expectations. The Central Bank believes that it will be much less than, for example, in the post-crisis period in 2009, since it was the ruble exchange rate that took the brunt of the blow.
When Russian assets that had fallen in price again turned out to be attractive among investors, the ruble began to win back its last year's fall.
What will happen next
The influx of investments cannot continue indefinitely, sooner or later it will weaken. This will happen when the exchange rate strengthens so much that the yield on some assets drops too much and ceases to compensate for the depreciation of the ruble expected by investors due to inflation. That is, the appreciation of the ruble will stop, and the exchange rate will stabilize around the new values, which, in fact, is already happening.
Most likely, there will be no more sharp jumps in the currency, but the ruble will continue to fluctuate up or down.
Due to the fact that the profitability of Russian foreign currency assets reached the level of last autumn, the Central Bank adjusted the rates on foreign currency REPO operations. This decision reduced the difference in returns between investing in dollar and ruble assets. At the same time, the ruble depreciated somewhat. Changes in interest rates on currency and ruble transactions of the Central Bank will continue to have some impact on the ruble exchange rate, along with other factors. Among them are changes in oil prices, the introduction or lifting of sanctions, the dynamics of inflationary expectations, the course of the monetary policy of other countries, and so on. Most likely, there will be no more sharp jumps in the currency, but the ruble will continue to fluctuate up or down as before.
We thank the Central Bank experts and First Deputy Chairman Ksenia Yudaeva for their help in preparing the material.
The ruble in certain periods of history (1998, 2008, 2014-2015) showed quite strong volatility. This made the population nervous and massively the US and the euro at their peak value. In such conditions, it is extremely necessary to understand the principles of formation of exchange rates and, in particular, the exchange rate of the ruble itself. Do you want to figure it out? Read our article, in simple language, for "dummies", it is told what determines the exchange rate of the euro and the dollar against the ruble.
The concept and history of the formation of the ruble exchange rate
The exchange rate of the ruble against the US dollar is set by the Bank of Russia on a daily basis on business days. The calculation is based on the results of trading on the dollar / ruble pair. The established rate comes into force the next day. Moreover, today individuals (customers of brokerage companies) can buy foreign currency and withdraw it to their bank accounts directly at the currency trading of the Moscow Exchange. The exchange rates of other currencies against the ruble, which are published by the Bank of Russia, are set based on their exchange rates against the US dollar on the international currency market, as well as on the basis of the official exchange rates of these currencies against the US dollar published by the central banks of these countries.
The exchange rates against the ruble of the countries participating in the economic and monetary unions are calculated on the basis of the official euro-ruble exchange rate using approved conversion factors.
The ruble exchange rate in different years was formed in different ways and has undergone many changes. Thus, since 1999, the Bank of Russia has formed the exchange rate of the ruble in the regime of a managed floating exchange rate. This made it possible to somewhat mitigate the influence of various kinds of external factors on the ruble exchange rate and the country's economy as a whole.
Since 2005, the Central Bank began to use the ruble value of the dual-currency basket, which consisted of the US dollar and the euro, to calculate the national currency exchange rate.
Since 2009, the ruble exchange rate has been formed by automatically adjusting the boundaries of the range of acceptable values for the value of the dual-currency basket. At the same time, foreign exchange interventions were carried out to maintain the ruble exchange rate in the required range. This is the name given to the purchase or sale of a sufficiently large amount of currency in a certain time interval in order to maintain (increase / weaken) the national currency exchange rate in the required range in accordance with the established policy for the formation of the ruble exchange rate by the Bank of Russia.
In 2010, the Bank of Russia abolished the fixed limits for the value of the dual-currency basket, which previously amounted to 26-41 rubles. From that moment on, the rate was formed in a managed floating exchange rate regime, in accordance with which there were no fixed restrictions, but the Bank of Russia carried out its interventions to smooth out strong fluctuations, helping to remove the shock effect on the population and foreign exchange agents. To implement its policy, the Bank of Russia used as a guideline the value of the dual-currency basket, calculated in the proportion of 55 cents and 45 euro cents. Although this cost was floating, it was still subject to adjustment depending on the volume of foreign exchange interventions carried out by the Bank of Russia. Moreover, at the end of the summer of 2014, the acceptable range for the value of the dual-currency basket was 9 rubles.
This policy was implemented until November 10, 2014. Since that date, the ruble has actually moved to a free exchange rate (determined by supply and demand in foreign exchange auctions). The oscillation limits that were in effect were cancelled. Elvira Nabiullina said that although the borders held back the ruble from the pressure of external factors, they carried the threat of additional demand for the currency. However, the Bank of Russia reserved the right to intervene in case of threats to the stability of the economy. Thus, the ruble moved to a floating exchange rate, which is influenced by supply and demand, depending on a combination of both economic and political factors.
What determines the exchange rate of the ruble in Russia
There are a lot of factors affecting the value of the ruble, and the intensity of their influence in different periods may be different. Economic factors include interest rates, inflation and the balance of payments.
Interest rates actually show the value of money - the lower the interest rate, the more actively lending and business development, the greater the money supply. And the more money - so they become cheaper, which means that inflation begins to increase. If interest rates rise, then money becomes more expensive, and starts to slow down, which moves the exchange rate up. But high rates can lead to the stagnation of the economy, as businesses will have to borrow at a higher price.
Inflation is important because it actually shows the cost of depreciating money. Traditionally, investors prefer to invest in currencies with a lower inflation rate. Actually, for this reason (more precisely, one of them), Russians love to keep money in US dollars, where inflation averages about 2%, which is lower than in Russia. It is extremely important to understand the dynamics of the balance of payments - the difference between the amounts coming from foreign countries and going abroad. The fact is that in order to purchase domestic goods and services, foreigners buy rubles, thereby supporting the demand for them. And if the state buys imports to a greater extent, then it has to sell rubles for foreign currency, which reduces the ruble exchange rate. That is, a positive balance of payments moves the ruble up, and a negative one down.
However, other factors can also influence the ruble exchange rate - for example, statements by major political figures and foreign exchange interventions by the Bank of Russia. Also, in a sense, the exchange rate of the ruble depends on the price of oil. It should be understood that if the general vector of economic development is directed upwards, then the currency of a given country becomes more expensive, and if the economy declines, it becomes cheaper.
Conclusion
The formation of the ruble exchange rate is a multifactorial process that may change from time to time. But in order for money to work as efficiently as possible and not become cheaper, it is extremely important to understand how the national currency exchange rate is formed.