The short-run impact of the Russian invasion of Ukraine on the euro-ruble exchange rate

When Russia invaded Ukraine in February 2022, one of the immediate consequences was a reduction in financial flows between Russia and the rest of the world due to international sanctions and Russia's own emergency capital controls (see here). Among other effects, this led to a decrease in the demand for euros and other foreign currencies (from Russians) and a related increase in the demand for rubles. Those changes should be observable in the data on the euro-ruble exchange rate. We should expect to see an appreciation of the ruble relative to other currencies.

Indeed, that is what this recent article by Sagiru Mati (Near East University) and co-authors, published in the Journal of Policy Modeling (sorry, I don't see an ungated version online), reports. They use a time series econometric model and data on the euro-ruble exchange rate from 1 January 2020 to 11 October 2022, testing for a change in the exchange rate after 24 February 2022 (when Russia invaded Ukraine).

Mati et al. don't find a step change in the level of the euro-ruble exchange rate. However, they do find a change in the rate of appreciation/depreciation in the exchange rate. Before the conflict, the ruble was losing value (depreciating) at an average rate of 0.04 percent per day. However, after the conflict, the ruble appreciated at an average rate of 0.21 percent per day (this averages out an initial steep decline in the exchange rate, followed by a rapid depreciation. This is shown in Figure 3(a) from the paper (although note that this graph shows the exchange rate in terms of the number of rubles per euro, so an appreciation of the ruble is a decline in the graph, while a depreciation is the reverse):

In other words, as expected the ruble began appreciating after the conflict, presumably due to an increase in the demand for rubles. The consequences of this appreciation include that Russian exports become more expensive for foreigners to buy (if priced in rubles, because more euros would be required for the same purchase) or less profitable for Russian exporters (if priced in euros, because the same quantity of euros would convert to fewer rubles). On the other hand, imports become less expensive for Russian consumers (if priced in euros, because fewer rubles would be required for the same purchase) or more profitable for exporters to Russia (if priced in rubles, because the same quantity of rubles now converts to more euros). Of course, sanctions on Russia extended to trade flows, so those potential changes were mostly moot.

International markets, including exchange rate markets, are frequently shifted by geopolitical shocks. Here is a case where the shock (the Russian invasion of Ukraine) had a largely predictable effect on the exchange rate.