Economic Policy Uncertainty Affects the Dynamics of the Exchange Rate

11:57, August 24, 2021

Sanctions and the pandemic depress the ruble exchange rate even as oil prices rise

The pressure of international sanctions devalues the ruble even when oil prices are rising. Under standard conditions, higher oil prices strengthen the Russian national currency, but this rule does not work under conditions of economic sanctions. Since the imposition of sanctions in 2014, the ruble has not strengthened even with rising oil prices.

The coronavirus pandemic factor also has a negative impact on the stability of the ruble exchange rate. The spread of the coronavirus limited international trade and investment activity: quarantine measures halted global production, while greater uncertainty prompted investors to withdraw funds from risky assets. Another consequence of the restrictions is the growing oil pressure: price wars begin between oil-exporting countries, as a result, the price of oil becomes unfavorably low for Russia.

The long-term policy of a floating exchange rate, which is implemented by the Russian monetary authorities, also leads to the depreciation of the ruble. With the reduced role of the Central Bank in managing the exchange rate, it is largely determined not by administrative but spontaneous market forces, the uncertainty of economic policy also makes the national currency cheaper.

The opposite effect is facilitated by a managed floating exchange rate regime implemented by the monetary authorities, as well as the intensification of foreign trade activities. Thus, when the volume of foreign trade increases, the demand for national currency increases on the part of exporters interested in exchanging foreign currency proceeds for rubles (for example, to pay taxes).

Such conclusions were reached by a group of researchers from Ural Federal University. Economists measured the reaction of the ruble exchange rate to Central Bank policy, supplementing the analysis with such controlling factors as the price of oil and the volume of foreign trade. The choice of variables is explained by the fact that oil prices have a decisive influence on the ruble exchange rate, while the volume of trade is a universal factor in the dynamics of the exchange rate. The economists published an article describing the methods, content and results of the research in the scientific journal Borsa İstanbul Review.

"On the Russian data the study of the dynamic response of the national currency exchange rate to economic policy uncertainty for the first time was carried out. Works published so far were devoted to the United States, European Union, Japan and China. However, since the Russian economy differs from them by a number of significant features (first of all, the change of several exchange rate regimes), the conclusions drawn with regard to foreign countries do not apply to it," emphasizes Kazi Sohag, research participant, senior researcher of the Laboratory of International and Regional Economics of the UrFU.

The researchers traced the correlation of the listed parameters from January 1, 1998, to September 30, 2020, and analyzed 5,935 daily groups of data using advanced econometric analysis techniques.

"All three econometric methods that we applied - quantile autoregressive distributed lag method (QARDL), quantile-on-quantile method (QQ) and Granger quantile causality method - confirmed the validity of the conclusions drawn," comments Oleg Mariev, head of the Economics Department at UrFU.

The authors of the article are generally positive about the actions of the Central Bank. At the same time, they recommend adhering to a more predictable policy and partially using the techniques of the ruble exchange rate regulation.

"On the one hand, ruble devaluation is beneficial to any Russian producer, because it leads to higher prices for imported goods on the domestic market and, consequently, increases the competitiveness of Russian goods. Devaluation is particularly beneficial for Russian exporters, as it increases their ruble revenues and improves their long-term prospects and further development opportunities. At the same time, the interests of producers in this situation partly conflict with the interests of the population: since most goods on the Russian market are of foreign origin, consumers are forced to spend more in ruble terms to buy them," explains Anna Gaynetdinova, specialist of the UrFU Center for Regional Economic Research.

This work was supported by a grant from the Russian Science Foundation (No. 19-18-00262 "Empirical modeling of balanced technological and socioeconomic development of Russian regions").