Consequences of Russian invasion on Ukraine: evidence from foreign exchange rates
ISSN: 1526-5943
Article publication date: 23 August 2022
Issue publication date: 3 February 2023
Abstract
Purpose
The stability of exchange rates facilitates international trade, diminishes portfolio risk, and ensures that economic policies are effective. The war in Ukraine is showing that the European financial system is still fragile to external shocks. This paper examines the consequences of the Russian invasion of Ukraine on five Euro exchange rates. The final goal is to empirically test whether the ruble caused the euro to depreciate with the Russian invasion of Ukraine.
Design/methodology/approach
The exchange rates analyzed are Euro/Russian Ruble, Euro/US Dollar, Euro/Japanese Yen, Euro/British Pound, and Euro/Chinese Yuan. The data collected are daily and cover the period from November 1, 2021, to May 1, 2022. In this context, the changes in the FX rates reflect two months of the ongoing war in Ukraine. The FX rates used in the study contain 137 observations indicating five months of daily series.
Findings
The results from impulse response function, variance decomposition, SVAR, and VECM indicate that the EUR/RUB significantly influenced the Euro devaluation. On the other side, the FX rates used in our work altogether hold long-run cointegration. The situation is different in the short run, where only EUR/RUB, EUR/USD, and EUR/CNY possess significant relations with other parities.
Originality/value
The Ruble is not among hard currencies, but its position strengthened during this period due to the importance of Russian gas to the Eurozone. The results indicate that even weak currencies can be influential depending on the geopolitical and economic situation. To this end, diversification remains a valid concept not only in portfolio construction but also for the preservation of the national economy.
Keywords
Acknowledgements
The authors would like to thank Harald Kinateder for helpful comments and discussions. All errors and omissions are the authors' own.
Citation
Aliu, F., Hašková, S. and Bajra, U.Q. (2023), "Consequences of Russian invasion on Ukraine: evidence from foreign exchange rates", Journal of Risk Finance, Vol. 24 No. 1, pp. 40-58. https://doi.org/10.1108/JRF-05-2022-0127
Publisher
:Emerald Publishing Limited
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