¶ … random walk down the streets of central Moscow will lead one to adopt a false perspective of the convertibility of the ruble. There are scores of small stores quoting rates for "pokupka" and "prodaja," bid and ask, prices for the U.S. Dollar and the Euro. These spreads generally amount to about.3 rubles; less than a penny. This reflects the relatively stable system of exchange that has predominated since the 1998 Russian bank defaults, steadily depreciating from 28 to the dollar to the current approximate exchange rate of 31.5. The Putin administration, until 2003, had favored a steady fall against the dollar and Central Bank officials had expressed confidence that the exchange rate would reflect only a slight weakening of the Ruble over the course of the next year; the exchange rate was expected to reach 33.7:1. According to the Moscow Times, The bank has also had to reverse direction on its gradual depreciation policy for the ruble, and is now targeting a 6% real appreciation against the dollar for the year. The currency, which has been steadily gaining against the greenback, rose another 3...

(Moscow Times, Friday, Feb. 21, 2003) This is in sharp contrast with the hyper-inflation that characterized the Ruble's progress prior to the defaults.
However, a more in-depth analysis of the ruble reveals this to be misleading. The ruble is not a fully convertible currency; Russians are not able to invest their rubles in foreign corporations and foreign debt, which has artificially inflated debt markets. Only foreigners are allowed by the state to be able to take their money from bank machines. This, coupled with a relatively undeveloped institutional lending environment, has stymied foreign direct investment, preventing foreign investors from buying enough rubles to invest in new ventures. Although capital flight is said to be practiced by wealthy industrial tycoons who wish to sequester their money in secrecy, such options are not available to the Russian middle class.

Despite concerns over limitations on liquidity, the investment community remains confident. According to James Fenker, an analyst at Troika Dialog, Russia now…