INTERNATIONAL BANKING AND FOREIGN EXCHANGE RATES IN RUSSIA
The causes of the devaluation of the ruble as a world currency are myriad, many of them deriving from incidents that happened on or around October 11, 1994, known in International Monetary Fund circles as "Black Tuesday." On that day, the ruble lost almost 25% of its value, closing at 3.926 to the dollar, its lowest value ever. Only two days later, it recovered, climbing 20% to 2.994 to the dollar. However, the political backlash lingered long after the one-day ruble shock. The causes behind the crisis are also of far more concern than the event itself (Rose, 1998, 11).
One of the central causes of the crisis was politicking in the bureaucracy. The tight (for Russia) fiscal and monetary policies which had successfully brought inflation down to moderate levels were relaxed over the summer of 1994, when government ministers caved in to pleas for handouts from agricultural and industrial producers and the government ordered the Central Bank to issue credits amounting to an estimated 7 trillion rubles in July and August alone (Kranz, 1997, 22).
This was a short-sighted act of fiscal irresponsibility had the effect of continuing to push up inflation, which had fallen to 4% per month in August, 1994, and then increased to 10% in October. The Central Bank reacted to this inflation by allowing the ruble to adjust by dropping in value from 2 to the dollar earlier in the summer to nearly 3 to the dollar at the beginning of October, 1994.
The implication of a weaker ruble would mean it would take fewer dollars to pay for the budget deficit caused by the increased credits and to pay delayed salaries (Russian banking..., 1998, 14). It would also serve to protect domestic industry by making imports more expensive. Most importantly, it brought to light the unfavorable operations and fiscal decisions of the Russian banking system. In September of 1994, the Central Bank a...