Devaluation is a process in which the real value of a currency is reduced artificially. The national currency is controlled by financial institutions that have chosen the devaluation process as the main management method.
With a floating exchange rate, the currency value is not officially assigned. In this case, if a depreciation occurs, then this is called a depreciation of the currency.
Simple words
In financial terminology, the concept of "devaluation" is quite common. What it is? In simple words, the term can be explained as follows. When the value of the ruble falls, and the currency of other states maintains its position or grows, this is called devaluation. For example, more recently, 1 kg of sugar could be purchased for a certain amount, today only 300 g can be bought for the same money. Money no longer has that significance. For countries that use the goods of foreign suppliers, this process is extremely disadvantageous.
Devaluation in Russia
The devaluation in Russia has occurred more than once. In 1998, defaulted. Then, in just a few months, the ruble exchange rate against foreign currency decreased by 246%. Previously, the cost of one dollar was 6.5 rubles, and after the collapse - 22.5 rubles. The second wave of devaluation overtook the ruble in 2008. Then the rate was 27 rubles per dollar. The devaluation of the ruble led to the fact that its exchange rate was rapidly falling and by the end of February approached the maximum allowable border of the currency corridor. Then a maximum exchange rate of 36.5 rubles per dollar was recorded.
In 2014, Russian citizens also felt the consequences of this unpleasant process. The ruble exchange rate has almost halved. There are several reasons for the devaluation. A significant impact on the depreciation had the holding of the Olympic Games in Sochi. To increase export revenue, the state needed to artificially reduce the national currency. Military events in Ukraine and the annexation of Crimea also significantly shook the financial stability of Russia. But the most important factor was a two-fold decline in oil prices. At the same time, the Russian economy was significantly affected by the sanctions of the United States and the European Union.
Types of devaluation
The devaluation of the ruble may be official, hidden, controlled and uncontrolled. During the official devaluation, the central bank gives an open statement that the currency is depreciating and will subsequently be withdrawn from circulation or exchanged for banknotes at the current exchange rate.
Hidden devaluation does not lead to withdrawal of money from circulation. With a controlled devaluation, the government is trying by all mechanisms and methods to keep the value of the currency, while all the preconditions for depreciation are present.
Uncontrolled devaluation is a process that is not under the control of the central bank. The state can no longer use mechanisms to maintain the course, and the situation is getting out of control. This is the most common type of devaluation.
The main causes of devaluation
Devaluation is mainly a consequence of macroeconomic changes. Among the reasons to note:
- The excess of imports over exports, which leads to a violation of the state trade balance.
- Decrease in the country's solvency.
- Growth in inflation.
To artificially reduce the exchange rate, the responsible authorities cease to maintain its value by comparing it with foreign exchange rates. As a result, the exchange rate is no longer tied to the currency basket.As a result of rising inflation, demand for products exported from the country may fall sharply. In this case, the control apparatus is forced to resort to devaluation.
Consequences of devaluation
Devaluation is a process that brings both positive and negative results. With a positive outcome, export operations improve, demand for locally produced goods increases, the trade deficit decreases, and domestic production increases. The devaluation of the national currency also has a negative side. This leads to inflation in the country, national banknotes lose their confidence, imports are oppressed, capital leaves the country, and the financial sector is collapsing. This is especially negative for enterprises that purchase raw materials and products from imported suppliers.
How to keep savings during devaluation?
It should be understood that devaluation is not a default. Therefore, it should be understood what needs to be done in such situations in order to avoid the loss of personal capital. If a loan was taken shortly before the devaluation, then this may turn out to be a profitable decision, especially if credit funds were invested in goods. Thus, capital will not only not be lost, but will also increase several times. For example, if you buy a car before the devaluation, then later, when the exchange rate drops to a critical point, you can sell it, thereby significantly saving. Since now only a small part of the proceeds from the sale will go to repay the loan. The rest of the amount will be the proceeds of the profit.
During the devaluation, one should not buy foreign currency. For ordinary citizens who do not have connections in financial institutions, this can carry certain risks. As a rule, the actual acquisition takes place at an overvalued rate. There is also another risk associated with a depreciation of the purchased currency. When the value of a currency drops sharply, then exchanging it is almost impossible, as banks suspend the exchange and are awaiting clarification of the situation.
The most effective method of preserving capital is to invest in it. Since in the process of devaluation development the value of the goods will only increase. This is especially true of foreign goods.
It is categorically unacceptable to store money in national currency. This can lead to their complete or partial loss. Such an unpleasant phenomenon is devaluation. What is it, in simple words to explain is not at all simple.
