Russia's Trade With G7 Countries and Asymmetric J‐Curve Effect

Abstract

This study investigates the relationship between exchange rates and trade balance, specifically focusing on Russia's trade dynamics with the Group of Seven (G7) countries. Employing a multifaceted approach, we scrutinize the asymmetric responses evident in the trade balance concerning fluctuations in exchange rates. Our investigation, rooted in linear analysis, initially reveals that rubble depreciation predominantly impacts the Russian trade balance adversely in the short term, albeit demonstrating a positive influence on trade balance in select instances over the long run—an observation aligned with the established J‐curve phenomenon. However, as we transition to nonlinear analysis, our findings yield stronger substantiation for the J‐curve hypothesis. Notably, our research underscores the asymmetric nature of exchange rate changes' effects on trade balance. Moreover, through nonlinear modeling techniques, we observe a pronounced enhancement in the convergence toward establishing a long‐term relationship between these variables. This emphasizes the significance of nonlinear approaches in comprehending the complexities inherent in exchange rate‐trade balance dynamics of Russian trade with G7.