The gloom that followed the August 1998 financial crisis has given way, in some circles, to euphoria. In the first half of 2000, the Russian economy grew by 7.5% compared to the same period in 1999. This excellent economic performance, most agree, is based on two factors: high oil prices and a weak exchange rate. High oil prices have been a bonanza for Russian energy exporters, which have enjoyed tremendous sales growth. Taxes collected on burgeoning oil sales have also eased fiscal problems, improving the investment climate. Meanwhile, the ruble's weakening against the dollar has made Russian firms much more competitive against foreigners. Together, strong oil prices and the weak ruble have done much to contribute to the growth of the Russian economy. Most in the Russian government are eager to see this combination continue.
This formula, however, is contradictory, because oil export revenues tend to strengthen the ruble. As explained in the next section, the Russian government and Central Bank have sought to avoid letting oil revenues affect the exchange rate, but this turns out to be quite difficult. This memo explains why it is so difficult, and then turns briefly to contending political views on the issue. […]