Oil and the Ruble: Collapse of Cointegration

Oil still contributes around 30 % to Russia's commodity export earnings, therefore the impact of oil prices on Ruble's exchange rate is of current interest to Russian economists. Instruments of time series analysis were used to test a proposition that the Russian ruble’s exchange rate has become less dependent on Brent crude oil price in recent years. We obtained 1,095 weekly observations for years 2000 to 2020 were obtained from FINAM company website. Our empirical model is a linear regression of the ruble’s exchange rate on Brent crude oil price. The Bai-Perron test has identified three structural breaks in the data corresponding to four chronological regimes. The Engle-Granger cointegration test has found both the rate and the price to be non-stationary in all regimes while cointegration was found only in the third regime (September 12, 2011 – October 23, 2017). The main reasons for collapse of cointegration in the fourth regime (October 30, 2017 – December 28, 2020) are 1) successful efforts by oil-producing countries to curb oil production, 2) decline in Russian import of goods and services, 3) Bank of Russia’s contractionary monetary policy, 4) built-in exchange rate stabilizer activated by the budget rule, and 5) anti-Russian sanctions. Cointegration, as it turns out, comes and goes.