Between the hammer and the anvil: The impact of economic sanctions and oil prices on Russia's ruble

Exchange rate fluctuations strongly affect the Russian economy, given its heavy dependence on foreign trade and investment. In the aftermath of the conflict between Russia and Ukraine that broke out early 2014, the Russian ruble lost 50% of its value against the US dollar. The impact of the conflict on Russia may have been amplified by sanctions imposed by Western countries. However, as Russia is heavily dependent on natural resource exports, another factor behind the deterioration could be the sharp decline in oil prices starting in summer 2014. Using high-frequency data on nominal exchange and interest rates, oil prices, actual and unanticipated sanctions, we provide evidence on forces underlying the ruble exchange rate. The analysis is based on cointegrated VAR models, where fundamental long-run relationships are implicitly embedded. The results indicate that the bulk of the depreciation can be related to the decline of oil prices. In addition, unanticipated sanctions matter for the conditional volatility of the variables involved. Journal of Comparative Economics 44 (2) (2016) 295-308. DIW Berlin, Mohrenstrasse 58, 10117 Berlin, Germany; Zeppelin University, Friedrichshafen, Germany; IES, Charles University in Prague, Czech Republic; Henan University in Kaifeng, China. (C) 2015 Association for Comparative Economic Studies. Published by Elsevier Inc. All rights reserved.