Macroeconomic effects of the expected future decline in oil revenues for the Russian economy under capital control

Abstract

Since the beginning of Special Military Operation in Ukraine, the Russian economy has faced a large number of sanctions from unfriendly states. At the beginning of 2023, Russia’s export revenues remain high. However, there are high risks of revenues decline over the horizon of several years due to restrictions on the part of unfriendly countries. Based on a general equilibrium model for the Russian economy, we analyze the impact of an anticipated shock from a reduction in future energy export revenues. First, the paper shows that the anticipated shock of a fall in export revenues leads to a short-term and medium-term increase in domestic investment. Under a closed financial account, the effect of growth in investment remains even if other export doesn’t react to currency appreciation, while under an open financial account, investment decreases. This indicates the important role of the rainy day savings factor for investment dynamics, when the possibility of savings in external financial markets is limited. Second, in the short and medium term, the impact of revenues decline is highly dependent on whether the financial account is open or closed. Under a closed financial account, the drop in macroeconomic indicators turns out to be sharp and localized in the vicinity of the period of export revenues fall. Third, the central bank’s interest rate moves in exactly opposite directions under inflation targeting regime in response to the unanticipated and anticipated export revenues shock.