The role of oil prices and the real exchange rate in Russia’s economy

The majority of people seem to believe that Russia’s economic climate and fiscal situation continue to be crucially tied up with global oil prices and the exchange rate of the rouble, even though this view has recently been questioned by a few analysts. Empirical study on this topic is, however, scanty. Within this report, the affect of international oil prices and the real exchange rate on Russia’s economy and fiscal policy is evaluated making use of VAR methodology and cointegration techniques. The investigation interval covered is 1995:Q1 – 2001:Q3. The outcomes reveal that in the long term a 10% permanent increase (decrease) in international oil prices is associated with a 2.2% growth (fall) in the level of Russian GDP. Correspondingly, a 10% real appreciation (depreciation) of the rouble is related to a 2.4% decline (increase) in the amount of output. These long-run equilibrium associations furthermore have a substantial influence on short-run dynamics through an error-correction mechanism. The estimation results verify also a strong dependence of fiscal revenues on output and oil price fluctuations. Approximated parameters and diagnostic statistics don’t suggest that Russia’s reliance on oil and the real exchange rate would somehow have weakened lately…

Right after the August 1998 crisis Russia’s economy began to recover rapidly, since the weakened rouble enhanced the price competitiveness of Russian firms and improved their profitability. Since the second quarter of 1999, besides the cheap rouble, Russia’s trade surplus continued to bolster because of an oil price-led export boom, which led to growth by easing liquidity constraints in the economy…

Source: Bank of Finland, Institute for Economies in Transition

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