Read mini case and answer the questions at the end. Must be 1 page paper. Answers must be well reasoned.

Mini case chapter 9 Russian Ruble Roulette1 The Russian ruble has experienced a multitude of regime shifts since the opening of the Russian economy under Perestroika in 1991.2 After a number of years of a highly controlled official exchange rate accompanied by tight capital controls, the 1998 economic crisis prompted a movement to a heavily managed float. Using both direct intervention and indirect intervention (interest rate policy), the ruble held surprisingly steady until 2008. But all of that stopped in 2008 when the global credit crisis, which started in the United States, spread to Russia. As illustrated by Exhibit A, the impact on the value of the ruble proved disastrous. Russian Crisis 1998 In an effort to protect the value of the ruble, the Bank of Russia spent $200 billiona full one-third of its foreign exchange reservesthroughout 2008 and into 2009. Although the market began to calm in early 2009, the Bank decided to introduce a more flexible exchange rate regime for the management of the ruble. The new system was a dual-currency floating rate band for the ruble. A dual-currency basket was formed from two currencies, the U.S. dollar (55%) and the euro (45%), for 1 the calculation of the central ruble rate. Around this basket rate, a neutral zone was established in which no currency intervention would be undertaken. This initial neutral zone was 1.00 Ruble versus the basket. Around the neutral zone a set of operational band boundaries were established; an upper band and lower band for intervention purposes. If the ruble remained in the neutral zone, no intervention would be made. If, however, the ruble's value hit either operational band, the Bank of Russia would intervene by buying rubles (upper band) or selling rubles (lower band) to stabilize its value. The Bank was allowed a maximum of $700 million per day in purchases of rubles. Once hitting that limit, the Bank was to move the band(s) in increments of 5 kopecks (100 kopecks = 1.00 ruble) per day.3 As illustrated in Exhibit B, the ruble continued to slide (appreciating) against the basket throughout 2009 and into 2010. The dual-currency band was continually adjusted downwardin an effort to put a \"moving floor\" underneath 2 the currency. Finally, in late-2010, the ruble stabilized. As part of its continual program to allow the ruble to grow as a global currency, the distance between the upper and lower bands has been repeatedly increased over time. Starting with a floating band (the spread between the upper and lower band in Exhibit B) that was only 2 rubles per basket value, the band was expanded to eventually reach 7 rubles. The ruble's newfound relative stability was rewarded in October 2013 when the Bank of Russia announced that it was expanding the neutral \"no-intervention\" zone from 1 ruble to 3.1 rubles. This was followed by an announcement in January 2014 that the Bank would begin moving to end daily intervention, with a plan to end all intervention sometime in 2015. (Daily intervention in recent months had averaged about $60 million, a relatively small amount given history.) If, however, the ruble did hit either of its bands, the Bank did acknowledge that it was prepared to reenter the market to preserve stability. The impetus for moving to a freelyfloating ruble was to both allow the changes in the currency's value to \"absorb\" global economic changes, and allow the central bank to increase its focus on controlling inflationary forces. Russian inflation has been stubbornly high in recent years, and with the U.S. Federal Reserve announcing that it would be slowing stopping its loose money policy in the wake of the financial of 2008-2009, inflationary pressures were sure to continue. But then the regime shift plan began to unravel 3 began to flee Russia. By December the Russian central bank estimated that more than $130 billion in capital had already left Russia, and another $120 billion in capital outflows were expected in 2015. On December 15, on what became known as Red Monday, the ruble lost more than 10% of its value. The Bank of Russia quickly increased its bank borrowing rate from 10.5% to 17%, the following day to 18%, but the ruble barely slowed. By the end of 2014 the price of oil had fallen to roughly $50 per barrel and the Russian ruble was trading at well over Rubles 60 per U.S. dollar. Now a new concern rose which all emerging market currencies faced with devaluation and depreciation: could the country pay its foreign currency debts in the near future? It was estimated that Russian borrowers of all kinds, government and business, faced more than $120 billion in hardcurrency 4 foreign debt (largely dollars and euros) in 2015 alone. Russian businesses of all kinds, including some of the world's largest oil companies, were now restricted from borrowing internationally. So they borrowed domestically, pumping out ruble-denominated debt at a breakneck pace. What would that mean for borrowers and debt-holders in the coming years? The Bank of Russia's plan to implement a long-term currency strategy, which had been put in place back in 2009, now appeared to be something of a train wreck. The Bank's original theorythat by increasingly targeting inflation rather than the value of the ruble, the longterm economic prospects for Russia and the ruble would be improved made sound economic and financial logic in a world of $100/bbl oil and no Western sanctions. Many inside and outside the Bank now wondered if the ruble could ever move from being a simple \"emerging market currency\" to a currency of value, a reserve currency. Mini-Case Questions 1. How would you classify the exchange rate regime used by Russia over the 1991-2014 period? 2. What did the establishment of operational bands do to the expectations of ruble speculators? Would these expectations be stabilizing or destabilizing in your opinion? 3. Would Western sanctions alone been devastating to the ruble's value, or was it the plummeting price of oil that had the larger impact? 5