A freely convertible currency (abbreviated as FCC) is a currency that can be exchanged (converted) for the currency of another state without any restrictions on the part of the legislation of the issuing country and its supervisory authorities. At the same time, both residents and non-residents of the country can use the right of free exchange.
Currency convertibility
The concept of freely convertible currency was introduced by the International Monetary Fund in 1976. Then the Western world moved away from the Bretton Woods financial system, which was characterized by the dominance of the US dollar and the firm exchange rate of the member countries' currencies. It was replaced by the Jamaican monetary system, the basis of which was the free conversion of currencies.
A currency is considered convertible if it meets the following conditions:
- freely applied in the settlement of current transactions of the balance of payments;
- there are no currency restrictions in relation to residents or non-residents;
- currency can be freely used as a tool for the movement of capital between countries.
In the absence of legal restrictions on the movement and exchange of national money, it becomes possible to regulate exchange rates only by market methods. Not every national economy is capable of this. Accordingly, not every currency can become freely convertible currency.
Hard currency are the currencies of states with a strong and stable economic system operating on market principles. The country must have sufficient foreign exchange reserves. In order for a currency to be highly quoted on the international market, the issuing country also needs to be widely involved in the global economy and trade. The most striking example of such a state is the United States of America.
What currencies belong to hard currency
In the late 1970-1980s, the following were recognized as SLE:
- U. S. dollar;
- brand of Germany;
- French franc;
- British pound sterling;
- Japanese yen.
To date, the list has expanded significantly. In addition, the French franc and the Deutschmark were replaced by the single European currency - the euro. Today, highly liquid hard currency includes:
- American dollar (USD);
- euro (EUR);
- Swiss franc (CHF);
- British pound sterling (GBP);
- Japanese yen (JPY).
These same currencies are recognized as reserve currencies. Central banks of various countries keep their foreign exchange reserves in them.
In addition, there is a large group of medium-liquid SLE. It:
- European national currencies: Swedish, Danish and Norwegian crowns, Hungarian forint;
- American currencies: Canadian dollar, Mexican peso;
- Asian currencies: Singapore and Hong Kong dollars, South Korean won, Israeli new shekel;
- Australian and New Zealand dollars;
- South African rand
Other types of currencies (by degree of convertibility)
In addition to freely convertible currencies, there are also partially convertible and closed currencies.
Partially convertible currencies are inherent in countries that have retained currency restrictions. PCI is freely circulated only in certain regions, a group of countries. An example is the Chinese yuan. This group also includes the Russian ruble.
The circulation of closed currencies is significantly limited by the authorities of the states that issue this money. Monetary units of most developing countries belong to this category.
Convertibility of the Russian ruble
As noted above, the national currency of the Russian Federation is partially convertible. But earlier, the authorities proclaimed a course towards converting the ruble into hard currency. Moreover, in 2006 the ruble was formally declared freely convertible.
But so far the Russian currency has not become hard currency. Even though the country's currency legislation has become more liberal. Many of the previous restrictions have been eased or removed altogether.
An important problem remains: the ruble is in little demand in international settlements. A very vicious circle of countries is ready to use Russian money. Western sanctions in recent years have further exacerbated the situation.
In addition, even the Russians themselves do not fully trust their monetary unit. Although, according to statistics, most of the country's citizens keep their money in rubles, investments in hard currency are not losing popularity.
