Russia is at a crossroads in dealing with one of its greatest dilemmas: how to set the ruble's exchange rate. The August 1998 financial crisis led to a very sharp and sustained drop in the ruble's exchange rate against the dollar. By the end of the year the ruble had lost 70% of its pre-crisis dollar value. Over the first nine months of 1999 the ruble lost an additional 17% of its dollar value. The exchange rate reached 25 to 1, as compared to 6.29 to 1 before the crisis.
The massive devaluation of the ruble did have some positive effects for the economy. With their rubles worth so many fewer dollars, Russians were no longer able to afford imported goods. They began to look for domestically produced alternatives, and many Russian businesses responded with alacrity. Russian exporters also benefited, because their costs for wages and other domestic inputs fell greatly in dollar terms, making them more competitive on world markets. These beneficiaries of devaluation also were able to pay many more rubles in taxes, easing Russia's fiscal crisis. It is widely feared, however, that the positive effects of devaluation will be short-lived. Opportunities to replace imports have largely already been realized. Meanwhile, inflation is starting to outstrip the continuing decline in the exchange rate. As a result, Russian prices are going up in dollar terms, eroding earlier competitiveness gains. By late summer 1999, for instance, automobile manufacturers were already finding themselves with substantial stocks of unsold vehicles. […]