Abstract Increasing trade and financial flows between the world’s countries has been a double-edged sword for emerging market economies (E...
Abstract Increasing trade and financial flows between the world’s countries has been a double-edged sword for emerging market economies (EMEs). On the one hand, it has given EMEs ample opportunities to benefit from world economic growth and from the significant financial resources accumulated by developed countries. On the other hand, EMEs have become more vulnerable to shocks in global financial markets, the origins, scope and size of which are often beyond the control of EME governments and monetary authorities. This paper describes the specific set of external and internal conditions the Bank of Russia has had to take into account, as well as some features of its monetary policy and the way these have evolved in recent years to cope with the challenges posed by a changing external environment. Keywords: Money supply, liquidity, intervention, Russia JEL classification: E58, E52, E51, F31 298 BIS Papers No 78 Policymakers in emerging market economy (EME) central banks are facing difficult choices.
The world economy is becoming more and more integrated, with crossborder trade and financial flows increasing rapidly in volume. On the one hand, this gives EMEs many opportunities to benefit from world economic growth and from the vast financial resources of developed nations. However, on the other hand, as EMEs become increasingly integrated into the world economy and thus more dependent on external demand and financing, they become more vulnerable to external shocks. Most EMEs are quite small, especially compared to the volumes seen in the world financial market, and fluctuations that are more or less manageable by the central banks of the world’s largest economies are much harder to control with the tools available to an average EME central bank.
Furthermore, many EMEs are undergoing structural changes. Their economic and financial conditions are subject to sudden and quite significant shifts even without external influence, and local central banks often have to focus on specific functions that at best are of secondary importance among the priorities of a “textbook” central bank. Some policy tools might be unavailable to them, while others may not be that efficient due to the specifics of the local economies or financial markets. Monetary policy itself becomes somewhat path-dependent, determined by past economic developments and policy responses, which greatly complicates the process of adopting central banking best practice. That said, the beginning of the 2000s was undeniably a prosperous time for most EMEs. Economic growth in these countries was much faster than the world average (6.7% per year in 2001–07 compared with 4.2% for the world economy). Global investors were happy to buy EME assets, fuelling a rally in the countries’ stock and commodity markets.
Russia was one of the main beneficiaries of this favourable global environment. Commodity prices boomed during the period, with oil prices alone growing by about 350% in 2001–07. As oil accounts for over 50% of Russian exports – and oil and other commodities making up more than 70% – the sharp rise in oil prices fuelled a threefold increase in Russia’s export volumes over the period. Meanwhile, the current account balance exceeded 10% of GDP in 2005–06, and economic growth accelerated as well, with GDP growing faster than 9% year-on-year by 2007. Oil price and exports GDP and external balance Source: Federal State Statistics Service, Bloomberg BIS Papers No 78 299 Of course, the boom was not restricted to commodity markets. Risk appetite was high in all segments of the world financial system, and leverage ratios were rising, as were the prices of risky assets and the capital flows to EMEs. Such an extreme (though still favourable) set of external conditions was at least partly caused by the monetary policy stance of the world’s major central banks. The Federal Reserve and the ECB were conducting loose monetary policies; the real policy rate in the United States was significantly negative during 2002–05, reaching –2%, while in the euro zone the real policy rate fell below zero as well, though not as much. Historically, these levels were very low, especially given the relatively high world economic growth rates during the period.
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