Download Impact of oil prices on Russian ruble on condition of floating

The 5th International Virtual Scientific Conference on Informatics and Management Sciences
March, 21. - 25. 2016, www.ictic.sk
Impact of oil prices on Russian ruble on condition of
floating exchange rate regime
Aliaksei Bykau, Abbas Ghodsi, Hamid Nezhadhossein
Belarus state economic university
Minsk, Republic of Belarus
Abstract—Since crude oil prices dropped in 2014, Russian
economy suffers recession and devaluation of local currency.
Central bank of Russia has switched to the floating exchange rate
of ruble in November 2015; as a result, the inverse relationship
between oil price and Russian ruble exchange rate is clearly
evident. The paper aims to measure the given statistical
dependence and examines its limitations.
Keywords - Russian economy, oil prices, exchange rate,
monetary policy
I.
INTRODUCTION
There is a hypothesis explaining collapse of the Soviet
Union through long-run decrease of world oil prices. This
hypothesis has not yet been proven, but the close dependency
of modern Russian economy on oil prices is obvious. The
question is: how much close. Will Russian economy be adapted
to lower oil prices, and, if so, in what way?
Unlike the Soviet Union of the late 1980s, burdened by a
great number of political and social problems, today’s Russia
has got the market economy and applies market self-regulation
tools for adaptation to the new external conditions.
Experts recognize that despite the importance of external
shocks such as lower oil prices and sanctions, structural crisis
is the key problem of the Russian economy. To overcome the
crisis it is necessary to provide an adequate business climate,
quality of human capital, and thus the effectiveness,
competitiveness of the economy and its individual institutions
[1].
II.
DEPENDENCE OF THE RUBLE EXCHANGE RATE ON OIL
PRICES
A good example of market self-regulation in Russia is the
Central Bank’s switch from the dual currency soft peg to the
floating exchange rate in November 2014. Earlier Russian
currency was pegged to dual-currency basket with US dollar
and Euro, and the Central bank propped up the ruble when the
exchange rate against these currencies exceeded its boundaries.
Recently the pressure on ruble strengthened and reserves began
to dwindle rapidly.
Floating exchange rate as a kind of monetary policy allows
the Central bank to don’t spend reserves for maintaining the
desired exchange rate of ruble, which is adjusted only on the
basis of market supply and demand. In turn, the supply and
demand for foreign currency derives from the changes in the
balance of payments. Market self-regulation reduces the
exchange rate of ruble after decrease in exports. That
consequently leads to reduction of imports. Thus, the floating
exchange rate prevents possible trade and budget imbalances in
the period of drastic decline in exports. Use of this kind of
monetary policy allowed softening the negative effect of
lowering oil prices on the Russian economy.
In the first half of 2014 68% of commodity exports of
Russian Federation were energy resources, including crude oil
(32%), petroleum products (23%) and natural gas (13%). In the
first half of 2015 exports of energy goods, valued in dollars,
fell by 37%, including crude oil - by 41%. Decline in export
prices had the main impact on exports decrease, while export
volumes increased by 6%. Non-energy exports decreased by
13%, but the share of non-energy goods increased from 32 to
40% of total commodity exports. The trade balance of services
reduced from -10% of commodity exports in the first half of
2014 to -7% in the first half of 2015 [2].
Such a drastic decline in exports could be dramatic for the
economy if the Central bank applied pegged exchange-rate
regime. In fact, Russian foreign trade surplus has not changed
significantly due to reduction of commodity imports by 39%.
This was happened because real incomes of all sectors of
economy were reduced proportionally to drop of exchange rate
of ruble, and imports became more expensive compared with
domestic goods and services.
The switch to the floating exchange rate made the Russian
economy more predictable relatively to its response to the oil
price changes. Is there correlation between the oil price and
exchange rate of ruble to US dollar?
High volatility of oil price makes this problem topical not
only for Russia. Western scholars investigated how the
exchange rate regime has an influence on relationship between
real exchange rates and commodity prices in developing
countries [3]. Prof. K. Korischenko proposed a simple model
for Russia [4]. Taking over the equilibrium price of oil in 3050
rubles per barrel, he derives (1):
OP  RER  3050 ,
where OP – oil price, USD/Barrel; RER – ruble exchange
rate, RUB/USD; 3050 – constant oil price, RUB/Barrel.
Using (1), it is easy to predict the exchange rate of ruble to
the US dollar at a given oil price. Indeed, the predicted oil price
of 3050 rubles per barrel is close to the average for the last 5
years (Fig. 1).
Financial markets, asset prices, international finance
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However, detailed analysis identifies certain changes in the
ruble price of oil. The upward trend was observed from the
beginning of 2011 until November 2014, and the downward
trend was observed from October 2014 to the beginning of
2016 (Fig. 2). The percentage change in price was determined
with respect to the maximum in October-November 2014.
4000
3800
3600
3400
3200
3000
2800
2600
2400
2200
2000
The statistical significance of these trends is not high:
coefficient of determination for linear models, which show the
dependence of the ruble price of exported oil on time, equals
0.54 and 0.60 (see Fig. 2). Meanwhile, in the last year we can
note with a certain probability decreasing of oil price measured
in rubles, if the ruble exchange rate is really equilibrium.
Figure 2. The dynamics of the ruble price of exported oil, RUB/Barrel.
Source: worked out by authors.
80
60
Exchange rate, RUB/USD
3000
130
2500
110
2000
90
1500
70
3000
50
2000
30
1000
500
0
0
40
20
Exchange rate, RUB/USD - left scale
Oil Price, USD/Barrel - left scale
Oil Price, RUB/Barrel - right scale
Figure 1. The relationship between the exchange rate of ruble and the oil
price. Source: calculated by authors using data from [5] and [6].
60
80
Actual exchange rate, RUB/USD (left scale)
Predicted oil price, RUB/barrel (right scale)
Actual oil price, RUB/barrel (right scale)
0
18
.1
1.
20
10
14
.0
9.
20
11
10
.0
7.
20
12
06
.0
5.
20
13
02
.0
3.
20
14
27
.1
2.
20
14
23
.1
0.
20
15
0
40
Oil price, USD/Barrel
1000
20
3500
150
4000
100
4000
Predicted exchange rate
(PER ), RUB/USD
Oil price, RUB/Barrel
170
It is also significant that during the period of ruble oil prices
increase from the beginning of 2011 to November 2014 (the
red line in Fig. 2) there was no correlation between the oil price
in US dollars and the ruble to US dollar exchange rate. From
November 2014, when the Central bank switched to the
floating exchange rate, to January 2016, statistical dependence
between these parameters proved to be quite close (Fig. 3).
120
- 16% per year
R2 = 0,54
18
.1
1.
20
10
14
.0
9.
20
11
10
.0
7.
20
12
06
.0
5.
20
13
02
.0
3.
20
14
27
.1
2.
20
14
23
.1
0.
20
15
The growth of ruble price of exported oil has a positive
effect on profits of mining companies, as the gap between their
dollar revenues and ruble costs increases. Growing profits can
then be reinvested to output extension so the overall increase in
the ruble price of oil contributes to the expansion of the mining
sector of Russian economy. The decline in ruble oil prices
reduces profits of mining companies, declining their
investments and adversely affecting the mining sector.
However, stronger ruble boosts domestic market that is more
favorable for non-energy domestic producers.
+7% per year
R2 = 0,60
Figure 3. Statistical dependence between oil price in US dollars and ruble to
US dollar exchange rate in the period from November 2014 to January 2016.
Source: worked out by authors.
The dependence of ruble exchange rate (PER) on the price
of oil (OP) can be described by a power function (2):
PER  656, 79 OP
0,001
0,6125
0,001
, R 2  0,80, DW  1, 75
(2)
where PER – predicted exchange rate of ruble, RUB/USD;
OP – oil prices, USD/Barrel.
According to the received power regression model (2), the
oil price below 10-15 USD per barrel could be critical for the
Russian economy and trigger hyperinflation. Full costs of oil
production including taxes for Russian companies vary from 10
Financial markets, asset prices, international finance
10.18638/ictic.2016.5.1.274
eISSN: 1339-9144, cdISSN: 1339-231X
- 68 -
ISBN: 978-80-554-1196-5
The 5th International Virtual Scientific Conference on Informatics and Management Sciences
March, 21. - 25. 2016, www.ictic.sk
to 35 USD per barrel [7] but they can be reduced with the
depreciation of ruble against US dollar. It is also noteworthy
that the power index in the given model (-0.6125)
approximately corresponds to the share of energy exports in
total commodity exports and reflects oil price elasticity of the
exchange rate of ruble to US dollar.
Comparison of the predicted values of ruble exchange rate
to the actual values in January 2016 showed the high accuracy
of the model. But the given model is static, like any other
regression model. In the dynamics, the balance of payments
always changes after the change in the structure of exports. The
share of energy exports in total merchandise exports declining
due to lower oil prices and higher US dollar to ruble exchange
rate. This reduces the absolute value of the elasticity
coefficient, which initially equals -0.6125. The ruble exchange
rate becomes less sensitive to decrease in oil prices; therefore
at a lower oil price forecasts of the exchange rate are
overpriced.
On the other hand, the influence of endogenous factors on
the exchange rate of ruble increases with the rapid decline of
oil price. The risk of panic in the market becomes significant
and can lead to a sharp depreciation of ruble against US dollar.
In this case, there is a possibility of the Central bank’s switch
back to pegged exchange-rate regime.
In assessing the effectiveness of the Russian Central Bank’s
monetary policy, it is important to compare it with the possible
alternatives that took place in other oil exporting countries. For
example, the central banks of Kazakhstan and Azerbaijan until
recently tried to maintain pegged exchange rate of national
currency, providing once-only devaluations [8]. In 2015 they
moved to a floating exchange rate regime. As a result, for
example, the Kazakhstan’s Tenge was depreciated by 1.95
times in comparison with November 2014. The Central bank of
Venezuela so far adheres to pegged exchange rate. This
economy is in a serious crisis in 2015, with 10% decline in
GDP and deficit of any imported goods. Saudi Arabia uses
fixed exchange rate since 1986. Due to the rapid depletion of
foreign exchange reserves after 2014, the kingdom is trying to
pay off the growing budget imbalance by the sale of their
major oil company through IPO.
III.
CONCLUSION
various goods and services. Thereby the main problem is
transition from resource-based to technology-based model of
economic development.
Our finding is floating exchange rate regime of Russian
ruble as a kind of tight monetary policy prevents trade
imbalances under high volatility of the world oil prices. This
policy is limited by the lowest possible market price of oil. If
oil price become less 20 US dollars per barrel, we expect the
ruble exchange rate exceed 100 rubles per UD dollar, as Figure
3 shows. In this case there is a risk of panic on Russian
currency marked.
The two types of the Russian government measures
preventing currency crisis could be considered. Thirst one
refers to the world oil prices stabilization. Recently, there was
reached an agreement between Russia, Saudi Arabia,
Venezuela and Qatar on the freezing of oil production, which
should stop the decline in world prices. The second type of
measures oriented towards domestic manufacturing
development. Implementation of import substitution projects in
manufacturing and agriculture could reduce the dependence of
the Russian economy on oil exports.
REFERENCES
[1]
[2]
[3]
[4]
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The decline of Russia's GDP in 2015 was 3.6%, and it is
too early to say that the peak of the crisis passed. Flexible
monetary policy of the Central bank is necessary but clearly
not sufficient condition to overcome the crisis and resume
economic growth. There is a problem of expensive loans for
Russian companies because of high volatility of ruble. Russian
economy needs to develop non-energy sectors that produce
[8]
Financial markets, asset prices, international finance
10.18638/ictic.2016.5.1.274
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eISSN: 1339-9144, cdISSN: 1339-231X
- 69 -
ISBN: 978-80-554-1196-5