Asymmetric Impact of Geopolitical Risk and Economic Policy Uncertainty on Russian Ruble Exchange Rate

Anna A. Gainetdinova

Ural Federal University named after the First President of Russia B.N. Yeltsin, Yekaterinburg, Russia

Abstract

The Russian economy has encountered substantial exchange rate volatility due to many endogenous and exogenous shocks, including the global financial crisis, sanctions, and the COVID-19 pandemic. These exogenous shocks tend to increase economic policy uncertainty, eventually leading to exchange rate fluctuations. In addition, the Russian economy is highly exposed to geopolitical risks, which also reflected in the dynamics of the exchange rate. The hypothesis of the study is that the response of the exchange rate to the positive and negative shocks in geopolitical risk and economic policy uncertainty may be asymmetric because of the expectations of economic agents. Thus, the objective of this study is to assess the asymmetric impact of geopolitical risk and economic policy uncertainty on the Russian exchange rate. As a preliminary analysis, the time series were tested for unit root and cointegration. I apply linear and non-linear autoregressive and distributed lag models (ARDL) that estimate asymmetric impact and provide results in the short and long term. The results of econometric analysis show that geopolitical risk and economic policy uncertainty affect the exchange rate asymmetrically in the short term, while their impact on the exchange rate is symmetric in the long term. In the short term, the exchange rate is more sensitive to negative shocks of geopolitical risk and economic policy uncertainty as compared to positive ones. At the same time, the negative impact of geopolitical risk is smoothed out in the long term. The theoretical significance of the study lies in expanding the standard model of fundamental factors affecting the dynamics of the exchange rate by examining nexus between "unobservable" factors and the exchange rate. The findings make it possible to improve the predictability of the exchange rate, providing valuable policy implications for investors and policy-makers.

Keywords

exchange rate; geopolitical risk; economic policy uncertainty; macroeconomic policies; non-linear ARDL.

JEL classification

References

1. Kisswani, K.M., Elian, M.I. (2021). Analyzing the (a) symmetric impacts of oil price, economic policy uncertainty, and global geopolitical risk on exchange rate. The Journal of Economic Asymmetries, Vol. 24, e00204. https://doi.org/10.1016/j.jeca.2021.e00204

         2. Sohag, K., Gainetdinova, A., Mariev, O. (2022). The response of exchange rates to economic policy uncertainty: Evidence from Russia. Borsa Istanbul Review, Vol. 22, Issue 3, 534–545. https://doi.org/10.1016/j.bir.2021.07.002

         3. Salisu, A.A., Cuñado, J., Gupta, R. (2022). Geopolitical risks and historical exchange rate volatility of the BRICS. International Review of Economics & Finance, Vol. 77, 179–190. https://doi.org/10.1016/j.iref.2021.09.017

         4. Ghosh, S. (2021). COVID-19, stock market, exchange rate, oil prices, unemployment, inflation, geopolitical risk nexus, the case of the BRICS nations: evidence quantile regression. In: Impact of Global Issues on International Trade. Edited by V. Erokhin, H. Gürel, N. Gürel, M. Lagutina. IGI Global, 85–105. https://doi.org/10.4018/978-1-7998-8314-2.ch005

         5. Hossain, A.T., Masum, A.A. (2022). Russian invasion of Ukraine, geopolitical risk, and global financial markets. SSRN Electronic Journal, https://dx.doi.org/10.2139/ssrn.4056137

         6. Wang, Y., Wang, K., Chang, C.-P. (2019). The impacts of economic sanctions on exchange rate volatility. Economic Modelling, Vol. 82, 58–65. https://doi.org/10.1016/j.econmod.2019.07.004

         7. Duan, W., Khurshid, A., Rauf, A., Khan, K., Calin, A.C. (2021). How geopolitical risk drives exchange rate and oil prices? A wavelet-based analysis. Energy Sources, Part B: Economics, Planning, and Policy, Vol. 16, Issue 9, 861–877. https://doi.org/10.1080/15567249.2021.1965262

         8. Chursin, A.A., Yudin, A.V., Grosheva, P.Yu. (2021). Intellectual Capital of Technological Transformation of Economy of Industrial Region. Journal of Applied Economic Research, Vol. 20, No. 4, 641–665. (In Russ.). https://doi.org/10.15826/vestnik.2021.20.4.025

         9. Iyke, B.N., Phan, D.H.B., Narayan, P.K. (2022). Exchange rate return predictability in times of geopolitical risk. International Review of Financial Analysis, Vol. 81, 102099. https://doi.org/10.1016/j.irfa.2022.102099

         10. Beckmann, J., Czudaj, R. (2017). Exchange rate expectations and economic policy uncertainty. European Journal of Political Economy, Vol. 47, 148–162. https://doi.org/10.1016/j.ejpoleco.2016.06.003

         11. Kido, Y. (2016). On the link between the US economic policy uncertainty and exchange rates. Economics Letters, Vol. 144, 49–52. https://doi.org/10.1016/j.econlet.2016.04.022

         12. Li, X.-L., Li, X., Si, D.-K. (2020). Investigating asymmetric determinants of the CNY–CNH exchange rate spreads: The role of economic policy uncertainty. Economics Letters, Vol. 186, 108827. https://doi.org/10.1016/j.econlet.2019.108827

         13. Nilavongse, R., Rubaszek, М., Uddin, G.S. (2020). Economic policy uncertainty shocks, economic activity, and exchange rate adjustments. Economics Letters, Vol. 186, 108765. https://doi.org/10.1016/j.econlet.2019.108765

         14. Vithessonthi, C. (2014). Monetary policy and the first-and second-moment exchange rate change during the global financial crisis: Evidence from Thailand. Journal of International Financial Markets, Institutions and Money, Vol. 29, 170–194. https://doi.org/10.1016/j.intfin.2013.12.006

         15. Rosa, C. (2011). The high-frequency response of exchange rates to monetary policy actions and statements. Journal of Banking & Finance, Vol. 35, Issue 2, 478–489. https://doi.org/10.1016/j.jbankfin.2010.09.008

         16. Abid, A. (2020). Economic policy uncertainty and exchange rates in emerging markets: Short and long runs evidence. Finance Research Letters, Vol. 37, 101378. https://doi.org/10.1016/j.frl.2019.101378

         17. Balcilar, M., Usman, O. (2021). Exchange rate and oil price pass-through in the BRICS countries: Evidence from the spillover index and rolling-sample analysis. Energy, Vol. 229, 120666. https://doi.org/10.1016/j.energy.2021.120666

         18. Jansen, D.-J., De Haan, J. (2005). Talking heads: the effects of ECB statements on the euro–dollar exchange rate. Journal of International Money and Finance, Vol. 24, Issue 2, 343–361. https://doi.org/10.1016/j.jimonfin.2004.12.009

         19. Bartsch, Z. (2019). Economic policy uncertainty and dollar-pound exchange rate return volatility. Journal of International Money and Finance, Vol. 98, 102067. https://doi.org/10.1016/j.jimonfin.2019.102067

         20. Omrane, W.B., Savaşer, T. (2017). Exchange rate volatility response to macroeconomic news during the global financial crisis. International Review of Financial Analysis, Vol. 52, 130–143. https://doi.org/10.1016/j.irfa.2017.05.006

         21. Balduzzi, P., Elton, E.J., Green, T.C. Economic news and bond prices: Evidence from the US Treasury market. Journal of Financial and Quantitative analysis, Vol. 36, No. 4, 523–543. https://doi.org/10.2307/2676223

         22. Christou, C., Gupta, R., Hassapis, C., Suleman, T. (2018). The role of economic uncertainty in forecasting exchange rate returns and realized volatility: Evidence from quantile predictive regressions. Journal of Forecasting, Vol. 37, Issue 7, 705–719. https://doi.org/10.1002/for.2539

         23. Roodbar, B., Metcalf, H., Casalin, F. (2019). Trading European Central Bank rumours on the EUR-USD exchange rate market. International Review of Financial Analysis, Vol. 61, 53–70. https://doi.org/10.1016/j.irfa.2018.11.001

         24. Liming, C., Ziging, D., Zhihao, H. (2020). Impact of economic policy uncertainty on exchange rate volatility of China. Finance Research Letters, Vol. 32, 101266. https://doi.org/10.1016/j.frl.2019.08.014

         25. Rautava, J. (2004). The role of oil prices and the real exchange rate in Russia's economy – a cointegration approach. Journal of Comparative Economics, Vol. 32, Issue 2, 315–327. https://doi.org/10.1016/j.jce.2004.02.006

         26. Delgado, N.A.B., Delgado, E.B., Saucedo, E. (2018). The relationship between oil prices, the stock market and the exchange rate: Evidence from Mexico. The North American Journal of Economics and Finance, Vol. 45, 266–275. https://doi.org/10.1016/j.najef.2018.03.006

         27. Krugman, P. (1980). Oil and the dollar. NBER Working Paper. Working Paper No. 554. National Bureau of Economic Research. Available at: https://www.nber.org/system/files/working_papers/w0554/w0554.pdf

         28. Bénassy-Quéré, A., Mignon, V., Penot, A. (2007). China and the relationship between the oil price and the dollar. Energy Policy, Vol. 35, Issue 11, 5795–5805. https://doi.org/10.1016/j.enpol.2007.05.035

         29. Jiang, Y., Feng, Q., Mo, B., Nie, H. (2020). Visiting the effects of oil price shocks on exchange rates: Quantile-on-quantile and causality-in-quantiles approaches. The North American Journal of Economics and Finance, Vol. 52, 101161. https://doi.org/10.1016/j.najef.2020.101161

         30. Wesseh Jr, P.K., Lin, B. (2018). Exchange rate fluctuations, oil price shocks and economic growth in a small net-importing economy. Energy, Vol. 151, 402–407. https://doi.org/10.1016/j.energy.2018.03.054

         31. Lin, B., Su, T. (2020). Does oil price have similar effects on the exchange rates of BRICS? International Review of Financial Analysis, Vol. 69, 101461. https://doi.org/10.1016/j.irfa.2020.101461

         32. Khraief, N., Shahbaz, M., Mahalik, M.K., Bhattacharya, M. (2021). Movements of oil prices and exchange rates in China and India: New evidence from wavelet-based, non-linear, autoregressive distributed lag estimations. Physica A: Statistical Mechanics and its Applications, Vol. 563, 125423. https://doi.org/10.1016/j.physa.2020.125423

         33. Kumar, S. (2019). Asymmetric impact of oil prices on exchange rate and stock prices. The Quarterly Review of Economics and Finance, Vol. 72, 41–51. https://doi.org/10.1016/j.qref.2018.12.009

         34. Habib, M.M., Kalamova, M.M. (2007). Are there oil currencies? The real exchange rate of oil exporting countries. ECB Working Paper No. 839. European Central Bank. https://dx.doi.org/10.2139/ssrn.1032834

         35. He, Y., Nakajima, T., Hamori, S. (2019). Connectedness between natural gas price and BRICS exchange rates: Evidence from time and frequency domains. Energies, Vol. 12, Issue 20, 3970. https://doi.org/10.3390/en12203970

         36. Ma, Y., Wang, J. (2019). Co-movement between oil, gas, coal, and iron ore prices, the Australian dollar, and the Chinese RMB exchange rates: A copula approach. Resources Policy, Vol. 63, 101471. https://doi.org/10.1016/j.resourpol.2019.101471

         37. Hartley, P.R., Medlock, K.B. (2014). The relationship between crude oil and natural gas prices: The role of the exchange rate. The Energy Journal, Vol. 35, Issue 2. https://doi.org/10.5547/01956574.35.2.2

         38. Isibor, A.A., Kehinde, A.A., Felicia, O.O., Tolulope, A.F., Victoria, A.A., Mercy, U.E. (2022). Achieving sustained performance in the Nigerian oil and gas sector despite exchange rate fluctuations: a VAR approach. International Journal of Energy Economics and Policy, Vol. 12, No. 3, 341–351. https://doi.org/10.32479/ijeep.12787

         39. Wang, Y., Wu, C. (2012). Energy prices and exchange rates of the US dollar: Further evidence from linear and nonlinear causality analysis. Economic Modelling, Vol. 29, Issue 6, 2289–2297. https://doi.org/10.1016/j.econmod.2012.07.005

         40. Reboredo, J.C. (2012). Modelling oil price and exchange rate co-movements. Journal of Policy Modeling, Vol. 34, Issue 3, 419–440. https://doi.org/10.1016/j.jpolmod.2011.10.005

         41. Dauvin, M. (2014). Energy prices and the real exchange rate of commodity-exporting countries. International Economics, Vol. 137, 52–72. https://doi.org/10.1016/j.inteco.2013.11.001

         42. Caldara, D., Iacoviello, M. (2022). Measuring geopolitical risk. American Economic Review, Vol. 112, No. 4, 1194–1225. https://doi.org/10.1257/aer.20191823

         43. Baker, S.R., Bloom, N., Davis, S.J. (2016). Measuring economic policy uncertainty. The Quarterly Journal of Economics, Vol. 131, Issue 4, 1593–1636. https://doi.org/10.1093/qje/qjw024

         44. Pesaran, M.H., Shin, Y., Smith, R.J. (2001). Bounds testing approaches to the analysis of level relationships. Journal of Applied Econometrics, Vol. 16, Issue 3, 289–326. https://doi.org/10.1002/jae.616

         45. Shin, Y., Yu, B., Greenwood-Nimmo, M. (2014). Modelling asymmetric cointegration and dynamic multipliers in a nonlinear ARDL framework. In: Festschrift in Honor of Peter Schmidt. Edited by R.C. Sickles, W.C. Horrace. New York, Springer, 281–314. https://doi.org/10.1007/978-1-4899-8008-3_9

         46. Vazhenina, L.V., Magaril, E.R., Mayburov, I.A. (2022). Comprehensive Assessment of Resource Efficiency of Russian Gas Industry Companies. Journal of Applied Economic Research, Vol. 21, No. 3, 454–485. (In Russ.). https://doi.org/10.15826/vestnik.2022.21.3.016

Acknowledgements

The research funding from the Ministry of Science and Higher Education of the Russian Federation (Ural Federal University project within the Priority-2030 Program) is gratefully acknowledged.

The author is also grateful to Dr. Kazi Sohag, Senior Research Fellow and Associate Professor at the Institute of Economics and Management, Ural Federal University, for guidance when conducting the study.

About Authors

Junior Researcher, Graduate School of Economics and Management, Ural Federal University named after the first President of Russia B.N. Yeltsin, Yekaterinburg, Russia (620002, Yekaterinburg, Mira street, 19); ORCID https://orcid.org/0000-0002-4374-3686 e-mail: anna.gainetdinova@urfu.ru

For citation

Gainetdinova, A.A. (2023). Asymmetric Impact of Geopolitical Risk and Economic Policy Uncertainty on Russian Ruble Exchange Rate. Journal of Applied Economic Research, Vol. 22, No. 2, 270-293. https://doi.org/10.15826/vestnik.2023.22.2.012

Article info

Received November 3, 2022; Revised February 28, 2023; Accepted March 20, 2023.

DOI: http://dx.doi.org/10.15826/vestnik.2023.22.2.012

Download full text article: