Effects of Terms of Trade Shocks on the Russian Economy

The principal interest of the paper is the quantification of terms of trade shock response of the Russian economy on a detailed computable general equilibrium (CGE) model calibrated with Russian input-output data. A number of recent theoretical studies ((Baqaee and Farhi 2019), (Atalay 2017)) stressed importance of explicit introduction of the intermediates in the models assessing effects of microeconomic and external shocks. CGE models permit introduction of rich details and complex production structures as well as optimizing behaviour of economic agents. The results suggest a decrease of welfare of the representative consumer and real GDP with the deterioration of the terms of trade. In the Central scenario (a 10% decrease in the world price of crude oil, a 3% decrease in the world price of natural gas and an 8% decrease in the world price of petroleum products) welfare of the representative consumer decreases by -3,55% of benchmark consumption level or 1,76% of the base year GDP in the comparative static model, where factors are fixed at benchmark levels. Welfare changes associated with the Central scenario of the steady-state model, where capital stock adjusts to it’s long-term level, indicate a significant decrease in the welfare of the representative agent up to -5,79% of benchmark consumption level or -2,92% of the base year GDP. These results exceed welfare changes in the Central scenario of the static model, and we can refer to these values as an upper bound of possible changes in welfare in the dynamic modelling exercise (Rutherford and Tarr 2003). The model was validated by historical simulation with observed levels of exogenous parameters, mimicking change in economic environment from 2011 to 2015. The results of the historical simulation stress the importance of fiscal parameters (i.e. export taxes) in analysis of production behaviour of Russian extraction industries.