After the Ruble, What Currency Falls Next?

Back to the PPP vs exchange rate disparity that occurred in Russia and might explain the recent ruble crisis:

xtline_ppp_fer_rus

The Russian PPP factor grew faster than the exchange rate, so by 2012 the difference between the indices of the two reached 1.5. A large difference appears in some countries hit by the 1997 Asian crisis:

xtline_ppp_fer

Indonesia looks very much like Russia. The media report that the rupiah already fell to its post-1998 minimum and that Asian central bankers are concerned about the ruble.

But Asia is not the worst place. Here’s the distribution of the same indicator across countries:

hist_di_ppp2fer

And the countries with the highest accumulated disparity are:

hbar_di_ppp2fer

The group consists of former Soviet republics, oil exporters with weak institutions, and poorest African countries. Runner-up Belarus already imposed a 30% tax on currency exchange (that is, added 30% to the dollar’s price) and raised the interest rate to 50%. Russia is in the middle, surrounded by Indonesia and Moldova. Since after this December, Russia’s coefficient is much lower, of course. Ukraine also devalued its currency this summer and drops out of the list.

Why does this problem appear at all? Apart from the economic literature, there’s a good intuition explained, for example, by Lee Kuan Yew. Very much admired by corrupted autocratic leaders, he recollects that the absence of corruption was the number one reason why Singapore handled the 1997 crisis better than its neighbors. Some countries on the list can’t say the same about themselves. And that makes them the next most likely candidates for big troubles.

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