How far away is the Ruble from being internationalized?

This month Russia introduced free convertibility of the Russian ruble. Russia has also fast tracked the establishment of a domestic oil exchange, and plans to use the ruble as the currency of settlement in the exchange. The realization of free convertibility of the ruble is one of the changes made possible by Russia's stable macroeconomic situation, adequate level of foreign exchange reserves, and financial surplus. The timing of the internationalization of the ruble has caused some concern.

As a traditional political and economic power, Russia has incomparable status in the international arena. Moderately developed countries cannot compete. The weakening US dollar has caused the structure of the international financial market to change. In this environment, Russia has regained its awareness of being a great power. Russia aims to challenge the status and benefits of the dollar and the euro in the international financial and commodity markets. In 2005, Russia ranked only fifteenth in the world in terms of economic output. To make the ruble an international currency and to create a more favorable environment for economic stability, Russia might be better to conceal its potential and wait, rather than fight at such close quarters.

Russia has been in a period of stable economic development for some years now. In 2005 the Russian Central Bank's gold and foreign exchange reserves grew rapidly, exceeding $200 billion. Russian officials say the domestic economic structure has undergone major changes. Domestic demand has become an important factor in supporting economic growth. However, soaring oil prices have had tremendous impact on the growth of the economy. Some analysts believe that Russia's economic growth is not independent. A drop in the price of oil would have a considerable impact on the Russian economy. Russia remains a price recipient in the world oil and commodity markets (including gold market) rather than a price maker.

In addition to stimulating economic growth in Russia, high oil prices disguise a number of potential problems. Instead of accelerating the opening of the country, Russia needs to take full advantage of the opportunity for economic growth by reforming the financial sector, speeding up the restructuring of the economy and reducing its excessive dependence on the energy industry. Russia's current banking asset structure is out of balance. Operating efficiency is low and the capital market is immature. All these problems make it difficult for Russia to resist any powerful external shocks. The experience of other emerging economies in opening a financial market shows that pursuing free currency convertibility under an immature financial system creates more challenges than opportunities. The financial crisis that took place in the 1990s in some emerging markets proves this point.

In Robert A. Mundell's ˇ®Father of the Euro' paper, "Order, Flow and Exchange Rate Dynamics", the economy has three objectives, only two of which can be achieved simultaneously; stability of exchange rates, free capital flow, and monetary policy independence. Using this idea, if Russia were to adopt a fixed ruble exchange rate, it would lose its independent monetary policy as soon as it opened its financial market. This is absolutely unacceptable to such a big country. While aiming for financial liberation, an independent monetary policy is likely to increase the fluctuation of the exchange rate. Obviously, maintaining the relative stability of the exchange rate level is of great importance to Russia, a country whose economic growth is to a large extent dependent on energy and commodity exports. It is of special significance that Russia has announced that it will be the responsibility of the current government to forecast the risks arising from free ruble convertibility and to take measures to minimize those risks. It is by no means a wise policy to hurry the internationalization of the ruble.

By People's Daily Online; The author is Sun Jie, researcher for the Institute of World Economics and Politics at the Chinese Academy of Social Sciences