This paper uses a dynamic money in the utility function model, where money services are produced both by domestic and foreign money balances, for empirical investigation of currency substitution between Russian roubles and U.S. dollars in the Russian economy during the period 1995–2004. Empirical results support the hypothesis of high degree of currency substitution: most of the estimates of elastic-city of substitution vary from 2 to 5.

Sharp fall in relative effectiveness of foreign currency in producing monetray servisies was reveiled for the period after the financial crises in 1998. One of the possible explantion comes from expectationes: the estimated probability of regime switch (from stabilization to the high inflation) corresponds to 0,35, which is relatively high.