The Russian Ruble Can't Be Saved With ReservesCommentary by Bob McTeer
December 16, 2014
My commentary on contemporary issues is through the prism of my long experience at the Federal Reserve. That experience formally began in August 1968 at the Richmond Fed as their new “international” economist. My first article for their economic review was on flexible exchange rates; the second was on the U.S. balance of payments.
It was during this period at the end of the 1960s and the beginning of the 1970s that the Bretton Woods system of fixed exchange rates was breaking down, with key developments in 1971 and 1973. There was much academic debate over fixed versus flexible exchange rates. More economists appeared to support fixed rates, but the other side had the advantage of being led by Milton Friedman. As it turned out, however, flexible rates were not “chosen” but were what was left when fixed rates collapsed.
My takeaway from that period that is most relevant to Russia’s situation today is that it is foolish to try to save a fixed exchange rate after it has come under severe attack. I’ve heard talk all day on the large amount of reserves held by Russia and whether they would be used to defend the collapsing Ruble. In my opinion, that would be a total waste of resources. The only cure for a Ruble down 50 percent is to let it go down even more, until the market recognizes the undershoot.
The adverse impact on Russia is, of course, well deserved. The best case scenario is for Russia to use the cover of international assistance on their exchange rate to get their boots off Ukrainian soil.