The currency corridor is the limit of fluctuation of the national currency rate set by the central bank of the country. It helps to establish a predictable rate of the national currency in the country and prevent the influence of external destabilizing factors, the emergence of crisis phenomena.
Currency Corridor in Russia
It is well known that the introduction of a currency corridor is carried out, as a rule, in the absence of available funds in the financial market, in conditions of a budget deficit and the presence of a large external debt.
The currency corridor was introduced in Russia in 1995, however, it existed in its original form for only two months. Then, the currency band was set in the range from minus 5.7% to plus 7.5% of the dollar rate.
In 1996, a new exchange rate band began to operate, but in June of the same year, Russia introduced a policy of the sliding rate of the ruble against the US currency. It was a kind of oblique exchange rate of the ruble against the dollar. Changes in the exchange rate of the national currency began to be tied to inflation forecasts, but with a slight lag.
In 2008, the global financial crisis erupted, during which a lack of liquidity began to be acutely felt in Russia. It was at that time that the Central Bank of Russia introduced a dual-currency corridor, which consisted of a ratio of 0.45 per euro and 0.55 per US dollar. Since that time, the ruble exchange rate within the bi-currency corridor has been supported by interventions from the Central Bank's foreign exchange reserves.
Floating ruble exchange rate
In the second half of 2014, world oil prices began to plummet and market speculators began to exert great pressure on the Russian currency. In connection with the massive purchase of the American currency, in the first days of November, the ruble began to fall sharply against the US dollar on the market. However, Russian banks no longer have an urgent need to buy dollars. This is due to the introduction by the Central Bank of Russia of a currency repo for a period of 28 days.
On November 11, 2014, the Central Bank of Russia took a truly historic step: in fact, it canceled the currency band, which kept the value of the dual currency basket at 0.55 and 0.45 per dollar and euro, respectively.
The ruble corridor, in fact, does not disappear at all, it is just that now the Central Bank of Russia will carry out currency interventions when it deems it necessary.
