Exchange rate shocks and foreign trade of Russian manufacturers

Abstract

The goal of this paper is to empirically assess the impact of exchange rate shocks on prices and quantities of Russian exports and imports. The relevance of the work is dictated by the sanctions imposed on Russia in 2022, which can complicate international payments in the dominant currencies in international trade, and by subsequent economic policy measures aimed at reducing the role of the dollar and the euro in Russian foreign trade. Modern studies consider the currency of the contract as one of the most important factors influencing the magnitude of the exchange rate pass-through effect on prices and quantities of exports and imports. The main assumption of such models – short-term price rigidity in terms of contract currency – matches the behavior of real data. These models also predict the dependence of the pass-through effect on the firm's share of the product-country market. In this paper, based on econometric analysis of detailed data from customs statistics of the Russian Federation, it is shown that the key to the dynamics of exports and imports is not bilateral exporter-importer rates, but exporter and importer rates to the dominant currencies in world trade (US dollar and euro), and prices are rigid in the contract currency. Because of the asymmetry in the response between importer currency shocks and exporter currency shocks to the contract currency, there is a statistically and economically significant effect of a uniform appreciation of the dominant currency. This means that Russia's foreign trade prices and quantities respond to the dynamics of the contract currency even if neither the exporter nor the importer is a country issuing the contract currency. This response persists in the long run, and therefore cannot be explained solely by short-term price rigidity. The pass-through effect depends on the value of exports and imports, which is consistent with the predictions of the theory. The main conclusion of the paper is that diversification of the currency structure of foreign trade contract payments will contribute to the sustainability of Russian foreign trade, but the question of the costs of such a transition remains beyond the scope of this study.

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