The Price of Oil and the Real Exchange Rate in Two Major OPEC+ Countries

Abstract

This paper assesses the sensitivity of the real exchange rates in two major OPEC+ countries, namely, Russia and Saudi Arabia, to shocks on oil price. We employ regression discontinuity designs and quantile regression analysis and allow for structural breaks. This paper is one of the first to use the regression discontinuity approach to assess the relationship between the price of crude oil and the real exchange rate of both countries. The results indicate that Russia’s real exchange rate depreciated significantly following the 2014 oil price crash. Saudi Arabia’s real exchange rate did not fall significantly during the same economic crisis. Quantile regression analysis is used to show how oil price swings affect the real exchange rates of each country in bearish, neutral and bullish currency markets. The results indicate that Russia’s real exchange rate appreciates (depreciates) as the price of oil increases (decreases) through all currency markets. This confirms what existing studies have shown through the quantile regression analysis approach. Saudi Arabia shows mixed results. The results indicate that Saudi Arabia’s real exchange rate does not always rise when the West Texas Intermediate (WTI) price of oil falls (and vice versa). This is mainly attributable to its fixed nominal exchange rate and asserts the role played by the exchange rate regime adopted by that country. The results indicate that Russia’s real exchange rate is more sensitive to crude oil price swings than Saudi Arabia.