Foreign Exchange Markets in Russia: Understanding the Reforms
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This paper analyzes and interprets the changes that took place in Russia’s exchange rate system during 1992. The multiple exchange rate regime that existed in Russia prior to July 3, 1992, created strong incentives for exporters to refrain from repatriating foreign exchange earnings, induced both importers and exporters to participate in unofficial markets for foreign exchange, and encouraged international barter transactions. Efforts to manage the exchange rate through heavy foreign exchange intervention were unsuccessful. The July 3, 1992, unification of the multiple exchange rate system provides important and general lessons for rectifying undesirable conditions caused by poorly implemented exchange rate policy.


This paper analyzes and interprets the changes that took place in Russia’s exchange rate system during 1992. The multiple exchange rate regime that existed in Russia prior to July 3, 1992, created strong incentives for exporters to refrain from repatriating foreign exchange earnings, induced both importers and exporters to participate in unofficial markets for foreign exchange, and encouraged international barter transactions. Efforts to manage the exchange rate through heavy foreign exchange intervention were unsuccessful. The July 3, 1992, unification of the multiple exchange rate system provides important and general lessons for rectifying undesirable conditions caused by poorly implemented exchange rate policy.

In 1991, Russian authorities announced their intention to make the ruble convertible. The announcement was made at a time of acute foreign exchange shortages in official markets, which persisted despite a prolonged decline in the value of the ruble. The Russian authorities, along with the international community, hoped that the move toward convertibility would spur economic growth and improve consumption opportunities for Russian residents. Moreover, the currency reforms were to provide greater transparency in the foreign exchange regime, as well as simplified access for Russians to the international currency markets at undistorted prices.

In Russia, the multiple exchange rate system created strong incentives for exporters to avoid repatriation of foreign exchange earnings. The system also resulted in strong incentives for both importers and exporters to avoid participation in legal interbank foreign exchange markets. The structure of foreign exchange surrender requirements in Russia taxed export earnings at a rate of approximately 30 percent. For importers, the cost of obtaining foreign exchange in official (interbank) markets was approximately 25 percent higher than the ruble price of foreign exchange on the black markets.

The exchange rate unification plan—begun on July 3, 1992, to unify the exchange rates applied to foreign exchange surrender by exporting enterprises—was seen as an important first step toward achieving currency convertibility. This new unified exchange rate implied a value for the ruble that was approximately equal to its more depreciated, floating value on the interbank market. A second step toward convertibility took place in mid-August and involved the elimination of several highly appreciated exchange rates that had been applied to centralized imports through mid-1992, although the practice of subsidizing selected imports remained an issue through 1993.

The exchange rate reform implemented by Russia contains many broad and valuable lessons. The unification sharply reduced the effective taxation of export activities, which the preceding system had imposed via unfavorable rates for surrendered foreign exchange. Adjusting for the taxes associated with the exchange rate regime, the resulting “effective” ruble price of foreign currency earned from exports was sharply depreciated and moved to a level close to the black market exchange rate. Incentives for exporters’ participation in legal foreign exchange markets increased sharply. For importers, the effective ruble cost of foreign exchange for import transactions rose sharply and also moved close to the black market exchange rate. By sharply reducing the gap between the price of foreign exchange on the black markets and legal markets, the reforms encouraged importers to participate in legal foreign exchange markets. For foreign investors, the unification allowed interbank exchange rates to be applied to capital flows into Russia. Before the first half of 1992, the Central Bank of Russia (CBR) did not clarify which exchange rate was to be applied to foreign direct investment.

Another broad lesson from the reform is that multiple exchange rate regimes should be discussed in terms of their impact on the total effective compensation to an exporter for his or her foreign exchange earnings and on the total effective price that importers pay for foreign exchange. Appropriate construction of the relevant official exchange rate (that is, the “effective” exchange rate) must include both the exchange rate relevant to the specific transaction and any additional taxes levied on flows channeled through the legal markets (such as profit taxes and foreign exchange surrender taxes). In Russia, the effective exchange rate for an exporter includes a weighted average of the exchange rate applied to foreign exchange surrender and the exchange rate available to exporters in the interbank foreign exchange market.

The usefulness of this adjustment can be shown in the context of the odd relationship that existed between Russia’s official and black market exchange rates before the July 1992 reforms. Usually, countries with balance of payments difficulties and problems of capital flight exhibit positive black market premia on foreign exchange. For Russia, the standard computations would suggest that black market premia on foreign exchange were negative, since the “free market” value of the ruble at auction and on the interbank markets was more depreciated than the black market exchange rate. When these adjustments are made properly, the apparent discount on the black market price of foreign exchange in Russia disappears.

This paper analyzes the implications of Russia’s pre-unification exchange rate regime, the unification itself, and the lessons from Russia’s experience. Before preceding with this discussion it is worth noting that the exchange rate unification implemented in Russia differs in several respects from the programs commonly implemented in other countries. In Russia, the unification refers to a merging of the multiple exchange rates that prevailed in official markets, while the parallel market for foreign exchange remained distinct. The closest analogies to the Russian system are dual exchange markets where there are leakages between the legal and black markets.1

This paper highlights only those policy developments directly under the rubric of exchange rate policy. Needless to say, monetary policy and other financial policies also strongly influence both the value of the ruble and the level of international transactions. Indeed, the extremely loose monetary and fiscal policies in Russia are important reasons for the capital flight and the sustained depreciation of the ruble in the second half of 1992 and in 1993. While these policies have a bearing on the value of the ruble in the foreign exchange markets, this paper focuses almost exclusively on the exchange rate mechanisms that bear on the functioning of foreign exchange markets and on related reforms concerning the use of official versus parallel currency markets.

I. Foreign Exchange Markets in the Pre-Unification Period

Through the end of 1990, Russia maintained a complicated system of multiple exchange rates. The system involved “differentiated exchange coefficients,” which were analogous to multiple exchange rates and consisted of several thousand coefficients that were applied to international transactions. These transactions were broken down by region, currency, and commodity. In January 1991, the structure of “differentiated exchange coefficients” was replaced by a more unified—but still complex—controlled exchange rate regime. This system was inherited by Russia after the break-up of the Soviet Union, and during the first half of 1992 several highly appreciated exchange rates for the ruble still applied to centralized imports (about 60 percent of imports during that period). For an exporting enterprise, the new system entailed a set of fixed exchange rates on foreign exchange surrender requirements and a single “market-determined” exchange rate that was established through the currency auctions or interbank exchanges.2

There were three distinct phases in the operation of Russia’s currency markets during 1992. The period between January and the end of April 1992 is referred to as the pre-unification period. Despite an early sharp swing between 230 and 139 rubles per dollar, the nominal exchange rate during this period remained fairly stable on the interbank market at a rate of approximately 150 rubles per dollar. Between early May and the end of June 1992, referred to as the interim period, the ruble posted strong gains in interbank markets after heavy central bank intervention using the sale of foreign currency. Since inflation was high during this period, the ruble was appreciating in real terms. The value of the ruble in the parallel market, while variable during this period, also appreciated in real terms. The period following July 3, 1992, is referred to as the post-unification period. Although this paper focuses mainly on the pre- and post-unification periods, a brief description here of the interim period may be useful.

During the interim period, foreign exchange market intervention by the Central Bank of Russia contributed to a temporary 25 percent nominal appreciation of the ruble in official interbank markets. This intervention was quite costly and fulfilled no clear purpose. During May and June 1992, the CBR supplied up to 80 percent of the resources that were sold in the interbank market, replacing supplies previously sold by exporters. The government’s announcements about sustainable exchange rates were not perceived as credible by market participants. The government’s loose monetary and fiscal policies continued to undermine the value of the ruble and were not consistent with the objective of ruble appreciation, As the CBR worked to achieve a gradual but steep real appreciation within a two-month period, speculative activity by exporters and importers proved profitable and resulted in direct transfers from the CBR.

The exchange rate objectives and intervention strategy used by the Central Bank of Russia motivated (i) a withdrawal of new exporter activity in official (interbank) foreign exchange markets, (ii) an increase in round-tripping activity, beginning with sales of retained foreign exchange earnings and followed by repurchases of foreign exchange via import demands, and (iii) an increase in import activity channeled through official markets.3

Simple numerical examples illustrate the implications of the foreign exchange system in Russia prior to July 3, 1992. These numbers demonstrate how the foreign exchange system created (i) strong incentives for exporters to underreport earnings, (ii) incentives for exporters to engage in barter transactions, and (iii) incentives to retain export earnings in illicit accounts outside of Russia and to avoid the interbank foreign exchange system. This system also fostered underinvoicing of imports in official markets and import smuggling via the black markets. In general, the official internal currency markets simultaneously taxed the transactions of both exporters and importers. To calculate the taxation of exports imposed by the system of foreign exchange surrender, the approximate levels of exchange rates, surrender requirements, and profit tax rates that were in place in Russia in April 1992 are used. These data, along with some explanations, are presented in Table 1.

Table 1.

Pre-Unification Exchange Rate Regime

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Table 2 uses the pre-unification exchange rate and tax data to demonstrate the effective taxes on the earnings of a Russian exporting enterprise under alternative scenarios.4 All computations are based on the returns to the marginal dollar earned by exporters.5 As presented, the numerical comparisons apply most directly to exporters of raw materials and other products subject to the full 50 percent foreign exchange surrender requirement. Analogous comparisons could be provided for those enterprises that were subject only to the 10 percent surrender requirement.

Table 2.

Tax and Revenue Flows Under Alternative Methods of Reporting and Valuing Export Earnings

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For Scenarios C, D, and E, rubles paid are calculated as the profit tax rate (32 percent) multiplied by the government-calculated ruble equivalent of foreign exchange earnings. The government calculations of ruble equivalents arc as follows; 0,5(62) + 0.5(90) for Scenario C; 0.5(62) + 0.5(150) for Scenario D; and 125 for Scenario E.

Average foreign exchange surrender at 62 rubles per dollar.

Scenarios A and B in Table 2 were illegal under the pre-unification regime: Scenario A reflects the value of complete nonrepatriation of export earnings, and Scenario B reflects the value of not reporting but repatriating earnings via black markets. The next two scenarios were legal ones. In Scenario C, an exporter repatriated his or her earnings, paid foreign exchange surrender and profit taxes, and kept any residual funds in “retained” foreign exchange earnings accounts. In Scenario D, instead of keeping these residual earnings in foreign currency accounts, the exporter converted his or her foreign currency into rubles using domestic interbank markets. Scenario E presents a fifth possibility for an exporter, one consistent with the letter, but probably not with the spirit, of the law: an enterprise could convert export earnings into “necessary imports for production” before the export earnings actually entered Russia; these imports were then resold in domestic markets.

The estimate of the marginal compensation received by exporters for a transaction channeled through official markets requires some explanation. First, for every dollar of foreign currency earned (and repatriated) by an enterprise, the surrender rules required 50 cents to be converted immediately into rubles. The effective exchange rate on this half of the earnings was 62 rubles per dollar,6 which compared with the 150 rubles per dollar on the interbank market and the 125 rubles per dollar on the black markets.7

Assume, as in Scenario D, that the enterprise sold the remainder of its export earnings in the interbank market. Then, for every original dollar of export proceeds, the enterprise ultimately received a total of 106 rubles (prior to profit taxation)8 This implies that the surrender system imposed an average export tax rate on foreign exchange earnings of 29.3 percent calculated relative to the interbank market rate9 and an average export tax rate of 15.2 percent calculated relative to the black market exchange rate. For many producers, the goal of avoiding these taxes may have been sufficient to induce underinvoicing or nonrepatriation of foreign exchange earnings.

The calculations for Scenario D assume that the enterprise sold its postsurrender export earnings in the interbank market in exchange for rubles. However, enterprises had another option for utilizing their foreign exchange earnings. The second option, illustrated in Scenario C, was for enterprises to retain their residual foreign exchange earnings in accounts in Russian commercial banks. This feature of the foreign exchange system in Russia further discouraged the conversion of foreign exchange earnings into “cash” or physical ruble notes via the interbank market. This system led to differential profit tax burdens on firms across the alternative options. The tax burden on firms was much higher when they converted their foreign exchange in the interbank market, as compared with the tax burden when earnings were retained in foreign currency accounts. This feature, termed in Goldberg and Karimov (forthcoming) the “tax haven effect on retained earnings,” could also contribute significantly to the avoidance of the interbank foreign exchange markets by exporters.

The numerical relevance of this “tax haven effect” is shown in a comparison of Scenarios C and D in Table 2. Suppose a firm kept its residual foreign exchange earnings in accounts at the central bank without converting them to dollars. Accounting practices in Russia ensured that these earnings would be valued in rubles for profit tax purposes and that taxes would be paid in rubles. To measure the profit tax base, the value of dollar balances in the accounts at the central bank were computed using the CBR market exchange rate. Note that this valuation method assigned a conversion rate of 90 rubles per dollar on retained earnings. Alternatively, if the export revenues were converted into dollars via the interbank market, profit tax liabilities of exporters were computed using a conversion rate of 150 rubles per dollar.

The consequence of this system was that for every dollar of foreign exchange earnings a profit tax of 24.38 rubles was owed if the dollars were not converted into cash rubles, and a profit tax of 33.92 rubles was owed if the dollar earnings were converted into cash via the interbank market.10 This implied that the profit tax burden on exporters could be reduced by almost 30 percent if foreign exchange earnings were not converted into rubles through internal currency markets and instead were maintained in foreign currency accounts at the commercial banks.

Scenario E reflects yet another alternative for exporters, one that was only quasi-legal and provided exporters with the means to evade foreign exchange surrender requirements. In this case, the incentive to avoid the taxes on foreign exchange surrender also provided the exporter with an incentive to become an importer of goods. Instead of repatriating foreign currency earnings, an exporter could purchase foreign currency goods that were nominally necessary as productive inputs for the firm. These imports could later be resold in domestic markets. For the computations in Scenario E, the value of these imports was the black market exchange rate. Assuming that the revenues from these resales were reported, the returns to this activity were between the purely legal and illegal scenarios presented in the first four scenarios.

Thus, avoidance of high taxes on foreign exchange surrender provides one explanation for the cross-border barter transactions with parties outside the ruble zone. By engaging in barter, the exporter was able to avoid foreign exchange surrender taxes, thereby receiving more favorable returns on export transactions channeled through legal markets. By contrast to returns on black market activity, the exporter was still required to pay profit taxes.11

Two other international flows also bear mention before leaving this discussion of the pre-unification period: foreign direct investment and import activity. With regard to the former, during the first half of 1992 the CBR did not clarify which exchange rate was to be applied to foreign direct investment in Russia. If foreign capital inflows were converted into rubles using the commercial exchange rate (55 rubles per dollar), the rubles purchased by foreign investors were three times more expensive than rubles purchased at interbank exchange rates.

As for importers, they had considerable freedom to purchase foreign currency in the interbank markets, and two general categories of import activity should be distinguished. Before unification, centralized imports were priced at numerous budgetary exchange rates introduced in February 1992, which ranged from 1.7 rubles per dollar to 70 rubles per dollar. Altogether, some 25 separate exchange rates were in place.12 For the remainder of Russia’s imports, as previously noted, the interbank rate was approximately 150 rubles per dollar compared with approximately 125 rubles per dollar in black markets. Clearly, this system also created incentives for importers to avoid official markets through underinvoicing imports and smuggling goods across borders.

In summary, the foreign exchange system that was in place in Russia prior to the July 3, 1992, unification created strong disincentives for exporters to repatriate foreign exchange earnings. It also strongly encouraged both exporters and importers to underreport the value of international trade. If foreign exchange earnings were repatriated, the tax haven effect on retained earnings reduced the likelihood that these funds would be sold in the interbank foreign exchange markets. If foreign exchange were earned but not repatriated, the exporting enterprise evaded both foreign exchange surrender requirements and profit taxation. International barter transactions provided one quasi-legal method of avoiding high surrender taxes. Finally, the conversion rates applied to foreign capital inflows implied prohibitive taxation of foreign investments in Russia.

II. Exchange Rate Unification in Russia

The July 3, 1992, move toward convertibility in Russia entailed a unification of the “official” multiple exchange rate system. While there is no single conventional definition of exchange rate unification, Russia’s unification differs from those undertaken by some IMF member countries. Often, unification refers to a merging of the official exchange rate market with unofficial parallel markets. Alternatively, unification is used to refer to the integration of a fixed exchange rate regime applied to trade transactions and a flexible exchange rate applied to financial transactions. Russia’s unification involved a merging of the many official exchange rates, while the parallel market and the market for capital account transactions remained distinct.

The unification occurred at a floating exchange rate that stood at approximately 135 rubles per dollar in early July. This was the new effective (pre-profit tax) exchange rate on export, import, and capital inflow transactions. Table 3 compares the unified exchange rate with the rates that previously applied to international transactions.13 The differences in black market exchange rates relevant for importers and exporters reflect the bid-ask spreads observed in black markets.

Table 3.

Comparison of Effective Exchange Rates on Transactions Before and After the July 1992 Reforms

(rubles per dollar)

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Under the assumption that other policy instruments would not be used to offset the impact of the reforms, the exchange rate unification would be expected to yield numerous positive real effects on Russia’s currency markets. These real effects include the following:

  • The large and distorting tax haven effect of retained earnings was eliminated. It arose because the exchange rates used for computing taxes differed across the uses of foreign exchange earnings. The removal of the tax-based advantage of retained earnings accounts increased the relative attractiveness of interbank market operations.

  • By equating the exchange rate on foreign exchange surrender with other “market determined” rates, the foreign exchange surrender tax was sharply reduced. This should stimulate repatriation of foreign exchange earned by exporters.

  • By reducing foreign exchange surrender taxes and the effective black market premia on foreign exchange, the reforms reduced the incentives to use international barter transactions to avoid taxes.

  • For exporters, unification implied both a real and nominal effective depreciation of the ruble in interbank markets. This point, combined with the preceding points, increased the incentives to report export earnings, and consequently could increase the foreign currency sold by exporters in official foreign exchange markets.

  • For importers, the unification sharply reduced the premium paid on transactions channeled through official foreign exchange markets. Indeed, importers realized a higher ruble value in interbank markets than in the black markets. This could stimulate total import demand and deepen the demand for foreign exchange in interbank markets.

  • For foreign investors, unification implied an immediate depreciation of the effective cost of rubles.

In fact, these improvements in the foreign exchange markets did occur in the second half of 1992. One additional implication of the reforms, however, was that the CBR no longer explicitly received the level of revenues that previously arose from its implicit taxation of surrendered foreign exchange. From late 1992 into the first half of 1993, another form of export taxation was implicitly introduced through the foreign exchange surrender regime. Specifically, although exporters were compensated at the current unified market exchange rate for their surrendered foreign exchange earnings, exporters’ accounts were not immediately credited with the rubles from this compensation. These delays proved quite costly to exporters in a high-inflation environment. The implicit taxation of exporter earnings through long and variable delays in compensation once again led to some of the onerous implications associated with the pre-unification exchange rate regime.

III. Concluding Remarks

This paper has documented and interpreted some of the developments in Russia’s foreign exchange markets during 1992. From these developments we gain important insights into the incentives and disincentives created by the multiple exchange rate regime that existed before July 1992. That system encouraged nonrepatriation of export earnings, international barter activity, and avoidance of legal foreign exchange markets by both exporters and importers.

The exchange rate unification implemented in July 1992 served to reduce the effective taxation of exporters, importers, and foreign investors in Russia. All else equal, the unification was expected to serve a number of very positive functions, including reducing price distortions originating in the official foreign exchange markets and increasing the overall attractiveness of official markets. The gap between effective exchange rates in legal markets and in black markets was nearly eliminated. Foreign exchange surrender taxes were also reduced sharply. These initiatives lessened the attractiveness of international barter activity as a means of avoiding foreign exchange surrender taxes. Other things equal, the reforms should tend to increase the reporting of both exports and imports and improve the functioning of interbank foreign exchange markets. These are general lessons that would apply to other countries that have the Russian type of multiple exchange rate regime.

It is clear that a continuance of these positive effects means eschewing repressive taxation of market-based export and import activity. Some export taxation, in addition to explicit taxes, could occur if exporters’ accounts are not expeditiously credited for surrendered foreign exchange. Moreover, if the CBR is to target any real or nominal exchange rate levels, it must be recognized that these will be credible targets only to the extent that they are consistent with the economic policies of the government. Without such credibility, the beginnings of a strong foreign exchange system can be undermined by the types of balance of payments crises often observed in developing countries.


  • Goldberg, Linda (1993a), “Exchange Rate Unification with Black Market Leakages: Russia 1992,” IMF Working Paper 93/13 (Washington: International Monetary Fund, 1993).

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  • Goldberg, Linda (1993b), “Foreign Exchange Markets in Russia: Understanding the Reforms,” IMF Paper on Policy Analysis and Assessment 93/1 (Washington: International Monetary Fund, 1993).

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  • Goldberg, Linda, and Ildar Karimov, “Internal Currency Markets and Production in the Emerging Market Economies,” Journal of Comparative Economics (forthcoming).

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  • International Monetary Fund (1992a), Economic Review; Russian Federation (Washington: International Monetary Fund, 1992).

  • International Monetary Fund (1992b), Economic Review: The Economy of the Former USSR in 1991 (Washington: International Monetary Fund, 1992).

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Linda S. Goldberg is an Assistant Professor of Economics at New York University. She holds a doctorate from Princeton University. This work was undertaken while the author was a Visiting Scholar in the Research Department of the International Monetary Fund. The views expressed herein are those of the author and not necessarily those of the International Monetary Fund. The author acknowledges numerous helpful comments, especially those of Ernesto Hernandez-Cata, Benedicte Vibe Christensen, Mohsin Khan, Malcolm Knight, and Robert Rennhack.


A model of dual exchange rate unification of the type pursued by Russia is provided in Goldberg (1993a).


This was the dominant system in place, although it must be noted that it was further complicated by all sorts of exemptions from surrender requirements and methods of avoiding use of the official auction and interbank system. IMF (1992a and 1992b) provide information on the exchange rate regime in Russia in 1991 and early 1992.


The reader is referred to Goldberg (1993b) for a more extensive discussion of this interval.


Export taxes, which were often not paid because of exemptions or illegal circumventions, are omitted from the examples.


Since this paper considers the returns to the marginal dollar of earnings, it does not adjust the results for the production costs facing an enterprise. This type of adjustment, which is relevant since profit tax effects are being discussed, would reduce the amount of taxation on earnings.


Of the foreign exchange surrendered, 80 percent was compensated at 55 rubles per dollar and 20 percent at 90 rubles per dollar [0.8(55) + 0.2(90) = 62 rubles per dollar].


The ruble appreciated by approximately 27 percent in nominal terms in the interbank market, from approximately 144 rubles per dollar in May 1992 to approximately 113 rubles per dollar in June 1992. In the first half of June 1992, the ruble remained near the latter level, reaching a high of 112.3 rubles per dollar. This appreciation of the ruble, caused by heavy intervention in foreign exchange sales by central banking authorities, served to increase the effective tax on using official markets since it reduced the effective compensation of exporters.


Fifty percent of these proceeds was surrendered at the rate of 62 rubles per dollar and the other 50 percent was converted at the rate of 150 rubles per dollar. Therefore 0.5(62) + 0.5(150) = 106 rubies per dollar.


This rate is calculated as (150 – 106) /150. This computation assumes that the foreign exchange earnings net of surrender were sold at the interbank rate of 150 rubles per dollar.


These calculations are on marginal dollars earned. In practice, profit taxation is levied on revenues net of expenditures on production inputs.


The author appreciates the useful suggestion by Roger Gordon that Scenario E be included in this table.


IMF staff estimates.


“Previously” in this context refers to the period preceding both the heavy CBR intervention in foreign exchange markets and the unification.