Influence of World Oil Prices and Exchange Rate on RTS Index

Currently, there are many studies on the relationships between world markets, oil prices and exchange rates. However, there are few studies about recent economic turmoil in Russia. The novelty of this work is an analysis of the new types of dependencies that have arisen due to the unique economic and geopolitical situation in the country in order to fill this gap in the scientific literature. This research paper examines how the dependence of the RTS index on Brent oil prices, dollar-to-ruble exchange rate, as well as on the world stock indexes changed as a result of the US sanctions imposed in April 2018 against Russia and the global coronavirus pandemic in 2020. We used daily closing prices for the period 03.01.2017 – 03.04.2020. The time interval was divided into three parts: pre-crisis period, period after the imposition of sanctions and the period after the start of coronavirus pandemic. Since all time series had the first order of integration and were cointegrated with each other, a VECM model was built for each period. Diagnostics indicated that there was no serial correlation in the residuals of the models. In addition, the following methods were implemented: Granger causality test, impulse response functions and forecast error variance decomposition. Due to time constraints, it was decided to test the third period for robustness so new VECM models were built for 20 consecutive days considering appearing observations. Finally, the stability of the results was confirmed. As a result of a comprehensive analysis, the following conclusions about long-term relationships were obtained. 1) In the pre-crisis period, there was a significant negative relationship between the exchange rate and RTS index, while oil prices did not affect the RTS dynamics. After the imposition of sanctions in 2018, Brent began to have significant influence, and there is a strengthening positive relationship between RTS and oil prices and a negative relationship between RTS and exchange rate every period. 2) The impact of S&P 500 on the RTS is significant and became positive after the US sanctions that indicates the direct dependence of Russian economy on the developed financial market of the USA during the crisis period. 3) After the coronavirus pandemic onset in 2020, both the Chinese CSI 300 and HSI indices began to affect RTS negatively. This direction of influence might be caused by the reverse dynamics of the spread of coronavirus in Russia, comparing with China. 4) In the pre-crisis period, the RTS index was negatively influenced by Western indices (S&P 500, DAX and FTSE) and positively by Eastern indices (CSI 300, HSI and Nikkei 225). After the second crisis caused by the coronavirus pandemic, these directions reversed: now the Western markets have a positive, and the Eastern – a negative impact on the RTS index.