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Monetary system of the Russian Federation in 2008-2014

Introduction

monetary inflation aggregate

The monetary system is one of the most important parts of economic science. Properly functioning monetary system injects the vital force into the cycle of income and expenditure, which represents the economy. A well-functioning monetary system contributes to both capacity utilization and full employment. And on the contrary, poorly functioning monetary system may be the main reason for the sharp fluctuations in the level of production, employment and prices in the economy, distort the allocation of resources.

The objective is to make a single, overall view of the monetary system, its origin and role in the economy.

On the basis of objectives of the work, there are following main tasks of the research:

1. Disclose the concept of the monetary system;

2. To consider the basic elements and principles of monetary system;

3. To consider the money supply and monetary aggregates and inflation.

4. To analyze the monetary system of the Russian Federation in 2008-2014.

My course work consists of an introduction, two chapters, conclusion, list of references and applications.

The legal basis of my work consist of - RF Constitution and federal laws listed below.

Russian monetary system operates in accordance with the Federal Law "On Central Bank of the Russian Federation (Bank of Russia)» N 86-FZ of 10 July 2002, "On the use of government securities of the Russian Federation to increase the capitalization of banks» N 181-FZ of July 18, 2009 "On additional measures to strengthen the stability of the banking system in the period up to 31 December 2011." N 175-FZ of 27 October 2008, "On banks and banking activity» N 395-1 of 02.12.1990 (ed. By 23.07.2010) (rev. And ext., Enters into force on 04.10.2010). These laws define the legal basis of the monetary system as well as the objectives, functions and authorities of the Bank of Russia in the organization of monetary and financial system.

Chapter 1. Theoretical bases of organization of the monetary system

1.1 Concept of the monetary system and its elements

Monetary system - a form of organization of money circulation in the country, developed historically and fixed in national legislation.

Monetary systems were formed in XVI-XVII centuries with the emergence and assertion of the capitalist mode production, but certain elements thereof appeared in an earlier period. There happened significant changes in the monetary system with the development of commodity-money relations and methods of production. [5]

Modern monetary systems of developed countries include the following elements:

• Monetary unit - is set by law currency, which is used for the expression and commensuration of the prices of all goods and services. It is generally divided into small proportional parts. In most countries there is a decimal system of division (1 US dollar equals 100 cents, 1 Eng. Pound is equal to 100 pence, etc.).

• The scale of prices - is a mean of expressing the value in monetary units, the technical function of money. At the metal circulation when the money commodity - metal - performed all the functions of money, the scale of prices represented a weight quantity of monetary metal, adopted in the country as a monetary unit or multiple units. States fixed scale of prices through legislation.

• Types of currency notes - is credit money and especially bank notes, small change and paper money. For example, in the United States there are in circulation banknotes of 100, 50, 20, 10, 5, 2 and 1 dollar, and the silver-copper and copper-nickel coins of $ 1, 50, 25, 10 and 1 cent.

• Emission system - a legally established order of the issuance and circulation of currency notes. The emission operations are carried out in the states by:

o Central Bank, which uses a monopoly right to issue bank notes (notes);

o Treasury (State executive body) that produces small bills of paper- currency notes (Treasury notes and coins from cheap metals);

• Institutions of the monetary system, ie. Public and private agencies that regulate monetary circulation. [2]

1.2 Principles of monetary system

Principles of construction of monetary system are closely linked with the elements of the monetary system and have an active influence on them.

Modern market-based monetary system is based on ten principles:

1) the principle of centralized management of the monetary system in market conditions is characterized by the fact that on the foreground there are not administrative methods of management (as in the planned economy model), but economic, when the state through the apparatus of the Central Bank puts on the market such conditions at which the various financial institutions and legal entities are forced to take the necessary state solution;

2) The principle of the forecast planning of money turnover. That means that the plans for the cash turnover - not a directive, but reference points that should be attained;

3) The principle of sustainability and elasticity of money turnover. The monetary system is to avoid inflation, but allow extending cash flow;

4) The principle of credit nature of money issue. The emergence of new banknotes - a consequence of bank credit operations;

5) The principle of security of issued into circulation banknotes. Money is provided by the banks' assets that are in inventory values;

6) The principle of insubordination of the Central Bank to the government of accountability to Parliament of the country.

Connected with the fact that maintaining the stability of monetary circulation and the fight against inflation is a priority for the Central Bank. But the Central Bank should report periodically to the Parliament (which acts like an arbitrator between the government and the Central Bank);

7) The principle of providing the government of funds only in the order lending. Allows not to involve money in the permanent deficit cover of the federal and local budgets and not to give an incentive to the development of inflationary processes; forces the government to seek sources of income of funds in the budget;

8) The principle of the integrated use of instruments monetary and credit regulation.

It should not be limited to one instrument of monetary regulation for the sustainability of cash flow, but to use a complex of tools what is more effectively;

9) The principle of supervision and control of money in circulation. The state through the banking, financial system and the tax authorities constantly monitors cash flow as a whole and its separate flows;

10) The principle of functioning of only the national currency in the country.[3]

1.3 Money supply and monetary aggregates

Monetary system of each country consists of different kinds of money. The fact that these species differ in its content and functionality, creates the opportunity and the necessity to divide the whole money supply into separate aggregates.

Each monetary aggregate consists of a certain kind of money, and each next aggregate is different from the previous one in that it further includes a new kind of money characterized by less liquidity. As a result, money with higher liquidity becomes part of the monetary aggregate with less liquidity.

Central Bank calculates the monetary aggregates M0, M1, M2, and M3:

M0 = cash in circulation (coins, banknotes).

M1 = M0 + checks, call deposits (including bank debit cards)

M2 = M1 + time deposits. M2 monetary aggregate is the main analytical parameter of assessment of the money supply. It reflects the set of payment instruments, affecting the commodity market, thus forming the amount of solvent demand of population and liquidity of the market capacity.

M3 = M2 + savings deposits, certificates and government bonds.

In some countries there exists aggregate M4, which in addition to M3 includes some securities in the form of saving bonds, treasury bills, etc. with a maturity up to one and a half years. In the US, such aggregate is indicated by the letter L. In some countries, there is aggregate M5, etc. In Russia, as in the United States, there are four units. [12]

In different countries, the relationship between various aggregates is different depending on the development of cashless payments, credit relations and banking.

Different is also the coefficient of monetization of GDP, which is determined by the ratio of M2 to GDP.

This indicator allows answering the question of the sufficiency of money in circulation. The optimal level of monetization for a developed country is considered at least 65-110%, the low level of monetization of the economy may restrain external economic development. [7]

1.4 Inflation

Inflation-crisis state of the monetary system first emerged in the middle of 18th century due to the great issue of paper money. During inflation occurs the depreciation of money, reduces the purchasing power of the population.

There are different types of inflation:

1. Demand Pull Inflation

This occurs when AD increases at a faster rate than AS. Demand pull inflation will typically occur when the economy is growing faster than the long run trend rate of growth. If demand exceeds supply, firms will respond by pushing up prices.

2. Cost Push Inflation

This occurs when there is an increase in the cost of production for firms causing aggregate supply to shift to the left. Cost push inflation could be caused by rising energy and commodity prices.

3. Wage Push Inflation

Rising wages tend to cause inflation. In effect this is a combination of demand pull and cost push inflation. Rising wages increase cost for firms and so these are passed onto consumers in the form of higher prices. Also rising wages give consumers greater disposable income and therefore cause increased consumption and AD. In the 1970s, trades unions were powerful in the UK. This helped cause rising nominal wages; this was a significant factor in causing inflation.

4. Imported Inflation.

A depreciation in the exchange rate will make imports more expensive. Therefore, the prices will increase solely due to this exchange rate effect. A depreciation will also make exports more competitive so will increase demand. [15]

Inflation rate can be found according to that formula:

Consumer Price Index (CPI) - measure the price of a selection of goods and services for a typical consumer. [14]

Chapter 2. Analysis of the monetary system of the Russian Federation at the present stage

The main parameters of the monetary system of the Russian Federation are defined in the Federal Law of February 2, 1990 № 394-1 “About Central Bank of the Russian Federation (Bank of Russia).” According to this law, the official currency of the Russian Federation is the ruble, which equals 100 kopecks. The law prohibits circulation on the territory of Russia of other monetary units or different money substitutes. The Russian government has refused to establish scale of prices. In the law it is written: "The official ratio between the ruble and gold or other precious metals is not installed." [1]

The monopoly right to issue and withdraw cash from the circulation is given to the Bank of Russia. It also has overall responsibility for the organization of cash circulation in the economy.

In this regard, the Bank of Russia has the following functions:

• forecasting and organization of production, transportation and storage of banknotes and coins, as well as the establishment of reserve funds;

• the establishment of rules of storage, transportation and collection of cash for credit institutions;

• The determination of the solvency of banknotes and order of replacement and destruction of damaged banknotes,

• the development of the order for Conducting Cash Operations for credit institutions;

• determination of rules, forms, terms and standards of implementation of non-cash payments:

• Licensing of payment systems of credit institutions.

Under the current legislation in Russia there are two types of currency: banknotes and coins. Treasury notes are abolished. Banknotes and coins are unconditional obligations of the Bank of Russia and secured by all its assets.

After denomination (scale change in prices) from January 1, 1998 in circulation there are banknotes in denominations of 10, 50, 100, and 500 and 1000 rubles and coins - 1, 2, 5 rubles, 1, 5, 10 and 50 kopecks. In 2006, 5000 rubles banknote was released.

Samples of banknotes and coins are approved by the Central Bank of the Russian Federation. Message of issue of banknotes and coins of new models, as well as their descriptions are published in mass media. They must be accepted at their face value throughout the country in all types of payments, for enrollment their account, on deposits and for translation. The period of withdrawal of old banknotes must be at least one year but not more than five years. Any limitation of the amount of subjects of exchange is not permitted at an exchange. Banknotes and coins can be declared legally invalid (null and void legal tender). Counterfeiting and illegal manufacture of money is punishable by law. [2, 76-77]

Condition of the monetary sphere

Let us analyze the dynamics of the monetary aggregate M2. The key monetary aggregate, which determines largely the monetary-credit policy of the country - is M2. [8]

In Table 1 analysis of the dynamics shows the uneven growth of the money supply. During the crisis of 2008-2009 it almost did not increase. For 2012, we see a slowdown in growth to 12%. On the one hand, it is a consequence of the central bank measures aimed at reducing inflation. On the other hand, it may indicate growing crisis phenomena in the economy.

As a positive factor can be estimated the continuing trend of reducing the share of cash money in the money supply. The more developed a country's economy, the smaller the share of cash money in circulation.

Factors that reduce this share are:

· The degree of development of cashless payments;

· Financial condition of the enterprises, existence of money at them on accounts that is defined by a stage of a business cycle.

Factors that increase the share of cash money are:

· the level of shadow economy in the country;

· Inflation and uncertainty about its dynamics.

The proportion of cash money in circulation in developed countries is generally in the range of 8-10%. For 01.01.2013 the share of cash money was 23%, having decreased for ten percentage points for the last 10 years.

In Graph 2 we can also analyze the growth of cash money and cashless funds share in money supply in Russia from 2009 to 2015. As we see, the minimum point is on 02.2009 and cash money there is approximately 3300 billion rubles and cashless funds are 8800 billion rubles. There is a tendency of huge increase of cashless funds in comparison with cash money. So, at the beginning of 2015 we see the share of cash money is equal 7100 billion rubles (has increased in comparison with 02.2009 in 2 times) and the share of cashless funds is equal to 25000 billion rubles. [11]

It is possible to estimate sufficiency of money supply for effective functioning of economy by means of an indicator of coefficient of monetization of economy.

In developed countries, the money supply of the economy is 2-3 times higher than in developing countries and is an average 65-110%. According to the statistics, in Table 3 we see that coefficient of monetization of Russia had its peak in 2011 - 43.9%. However, it should be noted that the positive trend of recent years has had due to the effect of such negative factors such as a slowdown of GDP growth. According to the Graph 4, 70% of countries with developing economy (including Russia) have a “financial depth” with GDP that is less than 60%. Russia, Bangladesh, Botswana, Costa Rica, Guatemala, Haiti, Honduras, Indonesia, Iraq, Jamaica, Kazakhstan, Kenya, Libya, Macedonia, Mexico, Moldova, Mongolia, Mozambique, Namibia, Nicaragua, Papua New Guinea, Paraguay, the Philippines, Romania, Serbia, Togo, Turkey, Ukraine, Uruguay, Latvia, Lithuania, Poland are in the same level of monetization of economy - from 40 to 60 %.[14]

Inflation

According to the Table 5 , in 2009, the government managed to keep inflation within 8.8% according to Rosstat data this inflation was the least since 1991. In 2010, the highest level of inflation was predicted is the level of 6.5-7.5%, but remained at the level of 2009 and was 8.78%.

In the following 2011, 2012, 2013 inflation dropped rapidly. This is largely due to several reasons:

· good harvest and lower prices for consumer goods;

· increase of the volume of food imports on the background of the strengthening of the ruble;

· withdrawal of oil and gas revenues from the money market;

· Entry of Russia into the WTO, etc.

A completely different situation is in 2014. Until recently, the Federal State Statistics Service together with the Ministry of Economic Development forecasted the inflation rate in 2014 in Russia at the level of 4.5%.

Such optimistic forecast had every reason to come true: Russian economy showed steady growth in GDP in the range of 2.5 - 3% Russian ruble gradually hesitated in the corridor of 32-35 rubles per dollar, investment inflows increased slowly, and the price of oil in the world, contrary to forecasts, did not fall. But politics has made its own adjustments, which economists are not able to take into account when drawing up their forecasts. From inaccurate estimates in 2014 inflation in Russia was 11.4%

The reasons for such sharp rise in inflation are obvious and in a greater degree have political nature due to the current hard international situation:

· the depreciation of the national currency

· inflation expectations due to the weakening of the ruble;

· The crisis in Ukraine;

· Introduction of grocery embargo for the EU, the USA and Canada;

· Russian range of sanctions from the EU, the US and Canada;

· A sharp decline in oil prices.

In 2014-2015 the government's measures in order to reduce the inflation are:

1. Limitation of the growth of prices for gas and electricity for industry.

2. Stockpiling of goods and seasonal products (particularly corn, diesel fuel, etc.).

3. The tightening of monetary policy (reduction of the money supply due to rising interest rates. In this case the expensive credits are not available).

4. In 2015, on the basis of new guidelines for the calculation of regulated tariffs planned to fix the price of water for 3 and 5 years.

5. Establishment of a special mechanism with the participation of the Central Bank and Ministry of Finance, which will increase the coherence of the monetary authorities.[8]

Conclusion

Summarizing all the above, it should be noted that the monetary system is a subsystem of the economic system of general education. It operates in the framework of general and specific laws of money; it is subject of general legal norms of society. So, monetary system is a form of organization of money circulation in the country, developed historically and fixed in national legislation. Its main elements are monetary unit, scale of prices, types of currency notes, emission system and institutions of the monetary system. The main principles of the monetary system are:

· The principle of centralized management of the monetary system in market conditions

· The principle of the forecast planning of money turnover.

· The principle of sustainability and elasticity of money turnover.

· The principle of credit nature of money issue.

· The principle of security of issued into circulation banknotes.

· The principle of providing the government of funds only in the order lending.

· The principle of insubordination of the Central Bank to the government of accountability to Parliament of the country.

· The principle of the integrated use of instruments monetary and credit regulation.

· The principle of supervision and control of money in circulation.

· The principle of functioning of only the national currency in the country.

The money supply is the total quantity of money in the economy at any given time. Economists measure the money supply because it is directly connected to the activity taking place all around us in the economy. It consists of M0, M1, M2, and M3:

• M0 = cash in circulation (coins, banknotes).

• M1 = M0 + checks, call deposits (including bank debit cards).

• M2 = M1 + time deposits.

• M3 = M2 + savings deposits, certificates and government bonds.

In some countries there exists aggregate M4, which in addition to M3 includes some securities in the form of saving bonds, treasury bills, etc. with a maturity up to one and a half years.

Coefficient of monetization of GDP allows answering the question of the sufficiency of money in circulation. The optimal level of monetization for a developed country is considered at least 65-110%, the low level of monetization of the economy may restrain external economic development. However, the maximum point of Russia is 43.9 %. So, it is in the same level of monetization of economy with such countries as Bangladesh, Botswana, Costa Rica, Guatemala, Haiti, Honduras, Indonesia, Iraq, Jamaica, Kazakhstan, Kenya, Libya, Macedonia, Mexico, Moldova, Mongolia, Mozambique, Namibia, Nicaragua, Papua New Guinea, Paraguay, the Philippines, Romania, Serbia, Togo, Turkey, Ukraine, Uruguay, Latvia, Lithuania, Poland.

Inflation-crisis state of the monetary system first emerged in the middle of 18th century due to the great issue of paper money. During inflation occurs the depreciation of money, reduces the purchasing power of the population.

The main types of inflation are:

1. Demand Pull Inflation

2. Cost Push Inflation

3. Wage Push Inflation

4. Imported Inflation.

The formula to find the inflation ratio is:

.

The main parameters of the monetary system of the Russian Federation are defined in the Federal Law of February 2, 1990 № 394-1 “About Central Bank of the Russian Federation (Bank of Russia).”

The main functions of the Bank of Russia are:

• forecasting and organization of production, transportation and storage of banknotes and coins, as well as the establishment of reserve funds;

• the establishment of rules of storage, transportation and collection of cash for credit institutions;

• The determination of the solvency of banknotes and order of replacement and destruction of damaged banknotes,

• the development of the order for Conducting Cash Operations for credit institutions;

• determination of rules, forms, terms and standards of implementation of non-cash payments:

• Licensing of payment systems of credit institutions.

According to the data, till the 2014 there was a drop in inflation rate due to some reasons:

· good harvest and lower prices for consumer goods;

· increase of the volume of food imports on the background of the strengthening of the ruble;

· withdrawal of oil and gas revenues from the money market;

· Entry of Russia into the WTO, etc.

However, due to the hard political situation, inflation rate has risen to 11,4% in 2014( almost twice from 2013). There are some measures to improve the anti-inflationary policy:

1. Limitation of the growth of prices for gas and electricity for industry.

2. Stockpiling of goods and seasonal products (particularly corn, diesel fuel, etc.).

3. The tightening of monetary policy (reduction of the money supply due to rising interest rates. In this case the expensive credits are not available).

4. In 2015, on the basis of new guidelines for the calculation of regulated tariffs planned to fix the price of water for 3 and 5 years.

5. Establishment of a special mechanism with the participation of the Central Bank and Ministry of Finance, which will increase the coherence of the monetary authorities.

List of literature

1. Federal Law of February 2, 1990 № 394-1 «About Central Bank of the Russian Federation (Bank of Russia)

2. Galina Beloglazova/Money, credit, banks: a textbook/ 2009/p 62-72

3. FINANCE MONEY AND CREDIT/Textbook/ Edited by prof. MV And Prof. Romanovsky. OV Vrublevskaya/ 2006/ p 20-35

4. FINANCE MONEY AND CREDIT/ Edited by Polyakov/2008/p 38-46

5. Money circulation and monetary system/Textbook/Glinkina IV/2005/p 26-29

Appendixes

Table 1 Dynamics of the monetary aggregate M2 and the share of cash in the money supply.

Year	М2, billion rubles	The rate of growth М2, %	М0, billion rubles	The share of M0 in M2,%
01.01. 2008	12869	43	3702,3	29
01.01.2009	12975,9	1	3794,8	29
01.01. 2010	15267,6	18	4038,1	26
01.01. 2011	20011,9	31	5062,8	25
01.01.2012	24483,1	22	5938,6	24
01.01.2013	27405,4	12	6430,1	23

Graph 2. Money supply (M2), billion rubles.

Table 3. Dynamics of the level monetization of the economy

Year	М2, billion rubles	GDP, billion rubles	M2/GDP, %
2008	12976	41277	31,4
2009	15268	38807	39,3
2010	20012	46309	43,2
2011	24483	55800	43,9
2012	27405	62599	43,8

Graph 4. Coefficient of monetization in different countries.

Table 5. Dynamics of average annual inflation rate in Russia from 2009 to 2013. (In%)

Yea	Inflation rate,%
2009	8,8
2010	8,78
2011	6,10
2012	6,58
2013	6,45

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