The Impact of 2022 Capital and Currency Restrictions on the Fulfillment of the Covered Interest Rate Parity

Abstract

This paper examines the fulfillment of the covered interest rate parity on Russian data from 2021 to 2023. The fulfillment of the covered interest parity means that investors are not able to profit from currency arbitrage using forward contracts. Crisis periods and restrictions on capital flows can clearly lead to non-fulfillment of interest parity. The purpose of this work is to study the dynamics of deviation from covered interest parity for three-month and six-month deposits for two currency pairs (USD/RUB and CNY/RUB) in the period before and after the introduction of sanctions in 2022 when the Russian economy faced significant shocks and restrictions on capital flows. In this work, the authors study the two currency pairs, one of which is subject to significant currency restrictions, and the other is free to exchange. In this paper, the authors use standard methods: graphical and econometric analysis; their use in such an acute period, previously unexplored in the scientific literature, determines the novelty of the work. As a result, the study revealed that since March 2022, the covered parity of interest rates has ceased to be fulfilled; the peak values of the deviation occurred in May and June 2022. By the beginning of 2023, the situation had stabilized, and the deviation from parity had decreased. Since March 2022, the ruble has lost its investment appeal, as amid overvalued exchange rates, expectations of the ruble weakening in the foreseeable future were included in forward contracts. Therefore, it was much more profitable to keep savings in foreign currency.