Exchange rate instabilities during the Russia-Ukraine war: Evidence from V4 countries

Purpose: This study investigates the impact of the Russian Ruble on the Czech crown, Polish zloty, and Hungarian forint during the Russia-Ukraine war. The euro is used as a comparative base unit in the four exchange rate parities. The Euro was used since the Czech Republic, Hungary, Poland, and Russia maintain intensive economic relations with the Eurozone. At the same time, the Visegrad (V4) countries are geographically located in the European continent and are bordered by the Eurozone member states.

Methods: The series stands in daily frequency and indicate the period from February 1, 2022, to February 1, 2023. To generate the results, the VAR impulse response function, variance decomposition, vector error correction model, and granger causality test were performed.

Results: Even though Russia demanded that gas payments be made in Rubles, this fact did not affect the Czech crown, Polish zloty, and Hungarian forint. Due to the fact that gas payments for the V4 countries were agreed in Euros through German contractors. During this period, the strong influence of the Czech crown on the Polish zloty and the Hungarian forint is observed.

Implications: From a policy perspective, the results provide indications for the national governments and regulatory bodies on the implications of the Russian ruble during this conflict. In short, our findings document that the instability of currency pairs is not only economic but also geopolitical. Energy dependence on autocratic states not only endangers national security but can set exchange rates in cardiac arrest. Moreover, the geographical proximity to the conflict zone tends to be decisive in the collapse of national currencies.