Assessing Russia's Non-fuel Trade Elasticities: Does the Russian Economy React 'Normally' to Exchange Rate Movements?

This article attempts to assess the impact of exchange rate movements on Russian import and non-fuel export performance, using an error correction model. The estimation of trade equations shows that long-run price elasticities for imports and non-fuel exports are close to 0.6 and 0.7 respectively, hence relatively similar to those obtained for OECD countries. The Marshall-Lerner condition clearly holds. More precisely, we find that a 10% real appreciation (depreciation) of the currency leads on average to a non-fuel current account deterioration (improvement) of around 1% of GDP. Moreover, the short-term dynamics of the error correction model indicate that the response of the trade balance to exchange rate shocks is rapid, the adjustment being almost complete after one quarter. Finally, the evolution of import prices and non-fuel export prices of Russia, relative to its competitors on domestic and third markets, suggests that by 2004 the Russian economy had already lost the price competitiveness advantage it had gained after the 1998 crisis.