Term Paper

Topics: Peak oil, Inflation, OPEC Pages: 18 (2465 words) Published: June 22, 2015
华 中 科 技 大 学
HUAZHONG UNIVERSITY OF SCIENCE AND TECHNOLOGY
WUHAN
THE PEOPLE’S REPUBLIC OF CHINA

The linkage between oil prices and currency fluctuation: Currency crises in Russia 2014-2015 Term Paper

Submitted by: Malanina Kseniia (李雅)
ID No. I201421275
Submitted to: Prof. Fang Zhuangzhi方壮志

Abstract
Recently and in the past year the world has been witnessing the rapidly decreasing price of crude oil. In this term paper will be enlightened the reasons that led oil price to decline as well as the affection of falling bulk commodity prices on the oil-exporting countries currency fluctuations. In view of recent world events, Russia has been on radar for observation of its depreciating currency due to number of factors that has been adding woes in to the Russian economy. This term paper concludes that there are positive relationship between oil price changing and fluctuation of currency of oil-exporting countries.

Key words: crude oil price, exchange rate, depreciation of ruble, trade of balance

Table of Contents

Background Introduction4
Literature Review6
Discussion7
Conclusion13
References14

Background Introduction
We cannot underemphasize the importance of crude oil in the present-day world, it is the most demanded and used commodity around the globe. Since 1998 the price of oil was increasing due to the increased demand, the emerging of huge markets in China and India, where the strong growth of energy consumption was dominating as their economies grew. In fact the price of crude oil per barrel was increased from $14 in 1998 to $145 per barrel in 2008 prior to crisis of 2008 (Graph 1). The increased price of oil helped Russian economy to boost its potential and keep GDP growth level at 6% on average in the time span of 10 years (Graph 2). Graph 1: Historical insight into crude oil prices.

Graph 2: Russian GDP annual growth rate in 10 years after oil price started increasing until the 2008 financial crises, when the oil price dropped.

As the credit crunch and high commodity prices took their toll on world economies in 2008, prices of oil crashed. Nevertheless, they were later “rescued” by large production cuts from the Organization of the Petroleum Exporting Countries (or OPEC). As the world economies hobbled back into shape, demand for crude oil grew. However, weak supply and a series of supply outages ensured that prices kept rising (Graph 1). But that changed recently as high prices and the American shale boom boosted supply to levels that exceeded demand. Thus the oil prices fell recently. In the economic theories, a commodities-exporting countries may experience exchange rate appreciation when the prices of commodities rise up, and depreciation - when they fall down. The Russian currency crises of 2014-2015 proves the theories. The understanding of comovement between oil prices and exchange rates is necessary for exchange rate risk management and monetary policies. Modern economy is evolving and changing faster than ever before. Thus it is essential to keep an eye on current tendencies and analyze its impact on economy in order to being able to forecast and implement policies to achieve better outcome in terms of growth on macro and micro levels both. Literature Review

Recently there have been done many researches on influence of commodity prices on the economy of oil-exporting countries. Some of them found very weak relationship of oil price and exchange rate, especially in case of Norway (Akram, 2004). Another research was conducted by Habib and Kalamova (2007), in which they were trying the find the relationship of oil price and exchange rate of Russia, Norway and Saudi Arabia. Scholars found very obsolete relationship of oil price and exchange rate in Norway and Saudi Arabia, however the relationship in case of Russia was clear and positive. In this study researchers tried to...

References: 2. Habib, M.M. & Kalamova, M.M. (2007) “Are there oil currencies? The Real Exchange Rate of Oil Exporting Countries”, ECB Working Paper No. 839
3
4. Hem C. Basnet*, Puneet Vatsa and Subhash Sharma (2014) "Common Trends and Common Cycles in Oil Price and Real Exchange Rate" Global Economy Journal, 14(2): 249–263
5
6. Zalduendo, J. (2006). “Determinants of Venezuela’s Equilibrium Real exchange
7
8. Stephanie Johnson (Jan 5, 2015). Russia’s rating is at risk, affecting your return on investment. http://marketrealist.com/2015/01/russias-rating-risk-affecting-return-investment/
9
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