Exchange Rate Shocks and Consumer Adjustment: Evidence from the 2014 Russian Ruble Collapse

• In Event: Global Distribution, Migration, and Shocks

Abstract

In this paper, we identify the causal effects of a sudden exogenous exchange rate shock on pricing and consumption behavior, leveraging the 2014 collapse of the Russian ruble. Product-level microdata on durable white goods allow us to observe not only price and quantity reactions, but also shifts in consumer choices regarding product quality and country of origin.

Our event unfolded throughout 2014, triggered by Russia’s annexation of Crimea, subsequent sanctions, a halving of oil prices and speculative attacks. After the ruble was floated in November, it had depreciated by 60% by mid-December. Finally, an opaque bond-backed loan to Rosneft triggered the ruble’s collapse on December 16. Consumers responded with a buying frenzy, anticipating especially purchases of durable goods.

Arguing that the depreciation was driven by exogenous international developments, our main specification analyzes the effects of the depreciation in an event study. Beyond quantity and price, we focus on shifts in choices of product quality and origin, leveraging metrics such as energy efficiency and functionality.

Our results reveal a significant anticipatory spike in purchases, with a marked shift toward higher-quality Western imports. Prices remained stable until the peak of the event in December, with pass through reaching or exceeding unity. The strong positive anticipation effect in demand is followed by a sharp decline, with heterogeneous effects depending on product quality and origin. A cross-country extension to eight European markets confirms our findings.

Given recent paradigm shifts regarding tariffs, international sanctions, and exchange rate volatility, this paper is of utmost policy relevance.

Author

• Timm Schaerfke, timm.schaerfke@fau.de