The Monetary System

During the 1990s, the Russian Federation experienced powerful inflationary pressures, marked notably by three peak periods. During the first period, between January 1992 and January 1994, Russia reached its highest inflationary levels; during the second, between August 1994 and January 1995, Russia hit a lower plateau; then after a significant decrease of inflationary levels and the achievement of what turned out to be a transitory stabilization in 1997, inflation pushed upward again between August 1998 and March 1999 (see Figure 25-1). All along, Russia was unable to address successfully its underlying fiscal imbalances, which were preventing both a sustained fiscal consolidation and a durable stabilization. The continual fiscal imbalances (to which I will refer in detail further on) left the economy particularly vulnerable to changes in world commodity prices (notably in 1998 due to the fall in oil prices, that is, in Russia's key export item). In addition, these imbalances affected deeply Russia's broadest access to international capital markets. By August 1998, faced with dwindling reserves despite high increases in interest rates, the government launched a series of emergency measures, including a de facto devaluation (namely one new ruble equal to 1,000 old rubles). After the August crisis, the government indicated that its monetary policy would henceforth be conducted in the framework of a flexible exchange rate, a policy guided primarily by the evolution of reserve money.