Remember 2008 and how unstable the economy of Russia was then, and 2013 and 2015? Devaluation, inflation, denomination, revaluation, stagnation ... Already entangled in the abundance of these unfamiliar economic concepts? Let's get out of impassable economic wilds together.
Term definition
In simple words, devaluation in the economy is the process of a fall (or depreciation) of a currency of a certain state relative to the value of banknotes of other countries. You can express this idea even more accessible. It is imperative to learn what devaluation is. In simple terms, this is a phenomenon in which (conditionally) today and tomorrow (yesterday and today) for the same amount it will be possible to purchase fewer goods and services on the world market.
Criterion
The main criterion by which specialists determine the beginning of the process is the reduction in the value of national money relative to some hard currency. To date, the devaluation of the national currency is revealed against the US dollar and the euro.
Floating and fixed course
A natural drop in the value of a country's currency, which is the effect of market factors, occurs when its rate is floating. In this case, the Central Bank has only an indirect opportunity to influence quotes due to foreign exchange interventions (foreign exchange interventions are some operations that are carried out by government bodies with the aim of influencing the national currency rate). However, such an option is also possible when devaluation in the economy is an accomplished task of the government in this area. And this situation most likely refers to a fixed rate.
The situation in Russia
The devaluation in Russia today consists in changing the quotation of the banknote within the established limits of a clear range. Otherwise, it is called the currency corridor. What is ruble devaluation in simple terms? It is better to ask representatives of the Central Bank. After all, it is this organization that oversees this process in our state. Moreover, sometimes the cost of Russian banknotes is reduced openly - the Central Bank officially announces the devaluation of the ruble. The hidden option is more characteristic of natural depreciation and occurs through a gradual decrease in the real price of money.
It is important to determine what devaluation is as a positive phenomenon. An open version of this process is often used to stabilize the financial and economic situation nationwide.
Inevitable consequences
What is devaluation as a means of managing the economy of a certain state, which leads to both positive and negative results? The consequences of the process have the following positive characteristics:
- decrease in the actual purchasing power of monetary units;
- improvement of export conditions;
- increased demand for domestic products;
- reduction of the balance of payments deficit;
- stimulation of domestic production.
Typical negative consequences are as follows:
- accelerated inflation;
- the formation of adverse import conditions;
- a drop in public confidence in the national payment unit;
- reduction in total investment in the state economy;
- widespread depreciation of bank deposits (except for multicurrency accounts or deposits in dollars and euros);
- "financial depression" (adverse financial changes both in the scale of the state and private economies).
As you can see, a surprisingly similar amount of positive and negative consequences of such processes within the state arises. Understanding this fact more clearly explains why the Central Bank-controlled depreciation of the national currency can be a targeted method for implementing state policy in the economic sphere. In simple terms, devaluation is a strategy.
Benefit
What is a useful devaluation? This phenomenon is characteristic of countries oriented primarily to export, with a wide range of goods and services they produce. Now we explain the mechanism for deriving benefits from this economic process. First, there is a decrease in various kinds of costs within the state (the most understandable and typical example is the cost of labor resources (labor)), followed by costs and lower prices for exported services or goods. Accordingly, their competitiveness in the foreign market is growing quite quickly and seriously.
China became the state that managed to extract the highest possible dividends from the depreciation of the currency planned by itself. The functioning of the domestic economy gradually began to slow down in the country, followed by a reduction in the volume of export supplies. How did the Chinese authorities react? Devalued the yuan. This bold move quickly led to obvious positive effects on the economy of the whole country.
Harm
Economic processes can also lead to a decrease in the speed of domestic economic movements, an increase in unhealthy social activity due to a general decrease in living standards, and many more adverse consequences. Not an exception, as we have seen, is also our case. Let us explain all this in simple words: devaluation can cause real damage to the country's economy.
This, of course, is a harmful phenomenon if high inflation is already observed in the country. Everything is extremely simple here - depreciation of the national currency will not be able to get the state out of the crisis, but only add unnecessary interest to inflationary influences.
There is another option when currency depreciation is a process that cannot lead to positive results. High and developed imports and absolutely inefficient exports of goods and services in conjunction with devaluation will definitely lead to immediate crisis.
Unfortunately, Russia can be considered in both cases. What does this consist of?
- 2013 is the period of inflation in Russia, in which it amounted to almost 6.5% (for you to understand the seriousness of the situation, let us denote the figures characteristic of “healthy” inflation - this is 1-3%).
- Food, services, technologies and even “minds” are part of the Russian import line.
- Export in our state, of course, is present, but only its main source is hydrocarbons. This type of export makes up as much as 63% of all income derived from external supplies.
The phenomenon of Russian reality
Let's talk directly about the topic that interests us. 2014 (as well as 2015 following it) is the year of devaluation in Russia. During this period, it was completely unnecessary to explain what kind of phenomenon it was, because everyone understood perfectly well the essence of the process. In 2014 - 2015, the real ruble collapsed by 100%; the exchange rate of the Russian payment unit dropped from 34 exactly two times, to 68 rubles per one US dollar. Now you can clearly see that acceleration of inflationary processes by more than two times is a natural phenomenon. As we mentioned above, in 2013 inflation in the Russian Federation amounted to slightly less than 6.5%, in 2014 it increased already to what seemed to be incredible limits of 11.36%. But this did not become the limit. 2015 was marked by an increase in inflation to a catastrophic level - 16%.
Winners and losers. Results for the country and its citizens
Devaluation can be represented as a kind of game of foreign policy partners and antagonists, and in any game there are winners and losers. In our case, first of all, all exporters win. Now they can receive increased foreign exchange earnings, which can be exchanged for rubles at a higher rate (after all, they pay wages to their employees and taxes to the state in rubles). In the Russian case, this is mainly the oil and gas industry, however, so far it only manages to compensate for its own losses from falling oil prices. Also, active participants in games with bank currency accounts can benefit from devaluation.
Who is inferior in this game? Actually, everyone else. Ordinary consumers, who make up the bulk of the country's population, lose because of higher prices in stores (including essential goods). This process brings little joy to domestic manufacturers that supply goods, primarily to the domestic market - citizens receive less, which means they cannot buy much (their ability to pay is reduced).
Devaluation and inflation
People often confuse the concepts of inflation and devaluation. Let's put all the dots over the "i".
Inflation is a long-term, steady and systematic increase in the general price level. In connection with the increase in prices, which is quite logical, the volume of goods and services that a consumer can purchase is reduced. As a result, we are faced with the depreciation of money in the country. The consequence of inflation is a reduction in the value of national payment units within the state (perhaps only within a single region). With devaluation, national banknotes lose their value on an interstate scale.
These two economic processes are connected with each other on one more point. Devaluation most often increases the rate of inflation.
Devaluation, stagnation and denomination
Let's move on to a new level of differentiation of seemingly similar concepts. First things first.
Stagnation
Stagnation is nothing but a stagnation in state economic development, which manifests itself in a constant decrease in the rate of economic growth, and the speed of this development tends to zero. The criterion for identifying and tracking stagnation is the growth of gross domestic product in one year. With obvious stagnation, this economic indicator takes (relative to the gross domestic product of the past year) values from 1% to 0%. The growth values may turn out to be negative, and this, in turn, speaks of an economic recession (a slowdown and a decline in production).
Let us turn to the opinion of experts in the economic sphere. Experts say that economic growth over the year, in the absence of any "diseases" (a healthy economy), has a value of 3-5%. Now we understand why stagnation acts as a sign of problems in the state economy, very often it is replaced by an economic crisis.
Denomination
A phenomenon like denomination is characterized by a change in the face value of banknotes. This is done in order to simplify the settlement procedure following the stabilization of the national currency. Very often, denomination entails such a state of the country's economy as hyperinflation. With this option, obsolete banknotes are denominated. Updated money has lower nominal values. This, in fact, is the essence of denomination as an economic phenomenon.
Revaluation
We have already figured out what devaluation is, but have you heard about revaluation? Revaluation is an increase in the exchange rate of the national currency relative to the monetary units of other states. Revaluation, first of all, leads to a decrease in the cost of goods and services of import and, accordingly, an increase in the price of exported products.
Revaluation Consequences
Revaluation objectively increases the value and value of the national currency. It stabilizes, then growth is stimulated. In the vast majority of cases, the state is the initiator of the revaluation.
In addition, through the methods of revaluation, the cost of goods and services rises, and demand for some types of products grows. At the same time, only decisive actions by the state can result in some truly significant events. These include:
- convincing manufacturers to manufacture products to a lesser extent;
- a decrease in total exports through the previous reduction in production;
- the closure of industrial plants and other enterprises.
As we understand it, increasing the value of a national currency means that a given state has the opportunity to buy the currency of another country at a much lower price. Such an economic measure is compelled. They resort to its implementation if the interest of exporters is more significant in comparison with the influence of debtors.