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Beyond traditional defenses: Unraveling the dynamics of reserves and exchange rate volatility in the face of economic sanctions

Author

Listed:
  • Ahmed Alwadeai

    (Central University of Finance and Economics, Beijing, China)

  • Nataliia Vlasova

    (University of International Business and Economics, Beijing, China)

  • Hadi Mareeh

    (Shandong University, Jinan, China)

  • Nadeem Aljonaid

    (Qilu Institute of Technology, Jinan, China)

Abstract

This study investigates the impact of economic sanctions on exchange rate volatility, with a specific focus on the role of foreign reserves in mitigating these effects across 21 countries from 2002 to 2022. Employing advanced econometric models, including Panel-Corrected Standard Errors (PCSE) and Feasible Generalized Least Squares (FGLS), our analysis identifies a positive correlation between economic sanctions and increased exchange rate volatility. A significant finding is that high reserves-to-GDP ratios do not fully stabilize exchange rate volatility in the presence of economic sanctions, challenging the traditional view of reserves as reliable stabilizers. It also demonstrates an inverse relationship between heightened reserves-to-GDP ratios and economic growth during periods of sanctions, indicating that larger reserves may reflect economic difficulties rather than strength. These findings implicitly call for a reevaluation of economic policies in favor of adopting strategies that mitigate global economic uncertainties. Supported by previous literature, the importance of international cooperation and governance that foster economic and trade diversification is highlighted. This approach can provide alternative sources of foreign exchange and reduce economic vulnerability to sanctions, enhancing overall economic resilience and stability.

Suggested Citation

  • Ahmed Alwadeai & Nataliia Vlasova & Hadi Mareeh & Nadeem Aljonaid, 2024. "Beyond traditional defenses: Unraveling the dynamics of reserves and exchange rate volatility in the face of economic sanctions," Russian Journal of Economics, ARPHA Platform, vol. 10(1), pages 1-19, March.
    • Handle: RePEc:arh:jrujec:v:10:y:2024:i:1:p:1-19
    DOI: 10.32609/j.ruje.10.118769
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    References listed on IDEAS

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    1. Aganin, Artem & Peresetsky, Anatoly, 2018. "Volatility of ruble exchange rate: Oil and sanctions," Applied Econometrics, Russian Presidential Academy of National Economy and Public Administration (RANEPA), vol. 52, pages 5-21.
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    More about this item

    Keywords

    economic sanctions exchange rate volatility total reserves geopolitical risks;

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • F51 - International Economics - - International Relations, National Security, and International Political Economy - - - International Conflicts; Negotiations; Sanctions
    • P45 - Political Economy and Comparative Economic Systems - - Other Economic Systems - - - International Linkages

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