1. The Ruble between the hammer and the anvil: Oil prices and economic sanctions Christian Dreger, DIW Berlin

2. Idea of the paper Impact of sanctions on Russian economy – Implemented because of conflict with Ukraine Driving forces of Ruble exchange rates – Due to quarterly frequency of national accounts only a few data points available – Ruble of key relevance for Russian economy, is available at high frequency Russia heavily depends on natural ressources – In addition to sanctions, oil prices might explain the Ruble development

3. Ruble exchange rate Per USD (line) and euro

4. Oil price evolution

5. Measuring sanctions Different strength of sanctions – Suspension of international talks, restrictions to individuals and companies, sanctions to industrial sectors Composite sanction index constructed by adding (0.1) dummies for individual sanctions Indicator unweighted or weighted – Weights control for strength of sanctions and trade shares of countries with Russia – Indicators for Western and Russian sanctions

6. Economic sanctions Unweigthed (line) and weighted

7. Sanctions and media Sanctions complemented by news indicator – Sanctions discussed by media even before they are implemented, impact on exchange rates Search for keywords in international press – News of eight countries, including US and Russia – Daily occurences of „Russia“ and „sanctions“ – Index equal to 0 before Crimea annexation Unanticipated component of sanctions – Residuals from regression of news on leads of sanctions, is bias introduced by media

8. Media indicator

9. Design of the analysis Series from Jan, 1, 2014, 1 to March, 31, 2015 – Ruble exchange rate, Ruonia interest rate, oil price, Western and Russian sanctions, unexpected component of sanctions – Russian banks intervened in the foreign exchange market to stabilize the Ruble – Variables nonstationary, except of unanticipated sanctions – Cointegrated VAR model for variables in levels – Multivariate GARCH for the conditional variance of errors

10. Cointegration analysis H 0 : r≤0H 0 : r≤1H 0 : r≤2H 0 : r≤3H 0 : r≤4 Trace71.85 (0.032)34.08 (0.502)13.40 (0.871)4.78 (0.879)0.81 (0.369) Unrestricted modelRestricted model βαβα Ruble1-0.049 (0.008)1-0.045 (0.008) Oil price1.853 (0.297)0.002 (0.008)1.937 (0.223)0 RUONIA0.072 (0.013)-0.503 (0.293)0.079 (0.014)-0.515 (0.271) Sanctions West-0.006 (0.003)0.379 (0.248)-0.005 (0.003)0 Sanctions Russia0.018 (0.009)-0.295 (0.268)0.019 (0.010)0

11. Impulse responses

12. Cointegrated VAR results Cointegration vector is unique, interpreted as Ruble equation (weak exogeneity) Generalized impulse responses reveal that oil price is most relevant – All responses show the expected signs Impact of sanctions on Ruble can be neglected – Sanctions interrelated, Russian response affected by Western sanctions, but escalation spiral not visible Results confirmed by decomposition of variance of forecast errors

13. Multivariate GARCH for VAR errors RubleOilRUONIASanc WestSanc Russia Constant0.002 (0.001)0.001 (0.001)0.005 (0.042)0.090 (0.061)0.000 (0.001) GARCH Lag0.922 (0.013)0.916 (0.022)0.447 (0.047)0.433 (0.034)0.435 (0.025) ARCH Lag0.338 (0.031)0.109 (0.043)-0.584 (0.055)1.284 (0.098)1.699 (0.084) Media 0.009 (0.003) 0.827 (0.080) Media(-1)-0.005 (0.004)-0.011 (0.004) Media(-2)0.005 (0.004)0.008 (0.004)-0.254 (0.160)-0.267 (0.114)0.034 (0.027) Media(-3) -0.014 (0.004)0.235 (0.169)-0.737 (0.083) Media(-4) 0.014 (0.004) 0.716 (0.103)0.053 (0.028) Media(-5) -0.371 (0.123)0.133 (0.023)

14. Conclusions Bulk of Ruble depreciation caused by oil price – Sanctions not important for the development of the Ruble Unanticipated sanctions increase volatility in international commodity (oil) markets – Can harm economic growth, policies should be as transparent as possible Media reports are partially self fulfilling – If stronger sanctions are expected, policymakers become less reluctant to further sanctions