BOFIT Discussion Papers, Institute for Economies in Transition, Bank of Finland
Choice of the substitution currency in Russia: How to explain the dollar's dominance?
Abstract: The analysis of external economic relations of Russia
reveals a paradox: while Europe is the main trade and direct investment
partner of Russia, this is far from being the case concerning its
currency’s role in Russia's financial activities. The dollar is much
preferred by economic agents for financial operations. This paper proposes
a disaggregated approach to this issue by separating the ‘means of
exchange’ and ‘store of value’ components of the use of substitution
currencies. The influence of three main factors (inertial component, real
trade relations and exchange rate fluctuations) on the relative demand for
the euro by Russian economic agents is tested for the period 1999-2004.
Finally we suggest a theoretical interpretation of the results based on the
conventions theory approach.
Keywords: dollarisation; euroisation; transition; Russia; currency substitution; asset substitution; network externalities; hysteresis; conventions; (follow links to similar papers)
JEL-Codes: E41; E52; F31; F41; G20; (follow links to similar papers)
43 pages, December 1, 2005
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