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The Russian Ruble Crisis
Russian Ruble Crisis
“The Russian Ruble Crisis and Its Aftermath”
This hub addresses the following topics referencing the Russian Ruble Crisis
1) Summarize the case focusing on what you consider to be the key points
2) Describe the legal, cultural, and ethical challenges that confront the global business presented in your selected case study.
3) Determine the various roles that host governments played in this particular global business operation.
4) Summarize the strategic and operational challenges facing global managers illustrated in your selected case.
In Russia, the 1990’s are often remembered as the era of the Russian ruble crisis. The Russian government paid the price for several decisions made during the communist reign, and the decisions made in an attempt to reconcile those problems caused the value of the ruble spiral downward. The Russian government played a large role in this inflation, and caused a challenge for businesses desiring to conduct business involving currency exchange. Owners who may have otherwise imported and exported through Russia may have considered the risk too great because of the severely unstable exchange rates. Businesses also face ethical and cultural challenges because of the corrupt nature of transactions.
After the fall of Communism in Russia, another form of adversity began to cripple the Russian economic structure. An economic reform program, implemented in the 1990’s, was designed to convert Russia’s communist economic system into a market economy. In the communist economy, also known as a centrally planned economy, the factors of production are managed by the government, and a market economy allows prices to be determined in a “free price system set by supply and demand” (Altvater, 1993). The central element of the transition plan was to remove price controls. Unfortunately, once these controls were removed prices began to surge and inflation ran ramped. “State planners during the communist era had held prices at artificially low levels” (McGraw-Hill, 2009). The supplies were down, and Russia was suffering from a limited supply of goods.
Consequently, when these prices were no longer regulated, they began to surge based on the law of supply and demand. The result, inflation took over. Many establishments began to fail, so, in an attempt to grasp at the confidence of citizens, Russia’s government began to desperately pour money into these businesses to minimize job loss. The government deficit was growing at a rate that was not manageable. “Unwilling to increase taxes, the Russian government printed more money which increased inflation” (McGraw-Hill, 2009). The rate of inflation was out of control, and the Ruble was severely instable. When inflation reached an annual low, the Russian government decided to take action. To reduce its instability, the Ruble was regulated to stay within a range of 4,300 to 4,900 against the dollar. At the same time, the Russian government requested IMF loans. The IMF agreed, but gave Russia’s leaders a list of expectations to follow that it believed would enable Russia to repay the loans.
“In return for the loan, Russia agreed to limit the growth in its money supply, reduce Public-sector debt, increase government tax revenues, and peg the ruble to the dollar” (McGraw-Hill, 2009). However, the hoarded rubles prevented deflation. As an answer to this problem, Russia began to use new currency. The new Ruble had an equivalent value to 1,000 of the old rubles. Though this granted the currency temporary balance, Russia’s government continued to spend more while collecting tax revenues that were lower than projected. The Ruble crisis made global business with Russia high risk, and many legal, cultural and ethical challenges exist.
In the face of turmoil, corruption often surfaces. With few people in a stable financial condition, global business owners may have been tempted to make unfair contracts, or to work outside of the laws because of decreased enforcement. In the same way, businesses had to make a decision on whether they would bring money made on exports back to Russia to help suffering employees, or to keep profits in the markets where the products are sold. Strategic and operational planning also presented significant challenges for companies doing business in Russia. Because the ruble was so instable during the 1990’s, writing long term trade contracts was nearly impossible. If one day a contract stated that you would pay the equivalent of 1,000,000 rubles for an amount of goods, the next day that contract may have lost or gained ten times the original agreement’s worth. To avoid this, when possible, companies would make agreements in U.S. dollars instead of rubles. Still, employees were weary to work for any currency because they could not determine how the amount of pay would translate when exchanged locally. During this era, many Russian employees would work for months without pay, and sometimes they would simply barter goods as payment instead of paying with the volatile ruble.
Though the 1990’s proved to be a troubled transition period for the Russian economic structure, the severe fluctuation in the ruble’s value was largely corrected after the release of the new currency. Because the price of goods had been held at artificially low levels during the communist rule, when the invisible hand of the market economy lifted prices and goods were scarce, many Russians simply hoarded their rubles. In addition to this unfortunate, though natural, market reaction, the Russian government failed to make needed reforms to prevent inflation from spiraling out of control. This calamity caused many potential investors to be weary of doing business that relied on the instable ruble. Other investors were forced to make many ethical decisions on the best business practices considering Russia’s economic strife.
Hill, Charles (2009). International business: competing in the global marketplace. New York: McGraw-Hill/Irwin.