In addition to producer’s currency pricing and local currency pricing, vehicle currency pricing and dollar currency pricing are also widely used and studied in the literature. the West in the case of gas considered here), while under local currency pricing, the exchange-rate risk is borne by the seller or exporter (i.e. Under producer’s currency pricing, the exchange-rate risk is borne by the buyer or importer (i.e. Such uncertainty may either harm or benefit ex post the bearer of the exchange-rate risk ex ante, which is not always easy to predict – hence the importance of stipulating the currency of payment in trade contracts. The currency choice matters since it determines whether the buyer or the seller bears the exchange-rate risk. Choice of payment currency affects the allocation of exchange-rate risk For example, an Italian exporter to Canada as well as to the UK or the US or any other country will set its price always in euros, irrespective of where it sells its products. More precisely, pricing-to-market is third-degree price discrimination, allowing different markets to be charged different prices (or payment currencies) for the same exported product.2īy contrast, under the ‘traditional’ Mundell-Fleming-Dornbusch paradigm in international trade and macro models prior the late 1980s, as well as in the seminal new open macro papers by Obstfeld and Rogoff (1995) and Gali and Monacelli (2005), export prices were modelled as being set in the national currency of the exporter, seller, or producer (i.e. For example, a Japanese exporter to France will set its price in euros and to the US in dollars. Buyer’s (or consumer’s) or local currency pricing – as in the new open economy macroeconomics literature of the turn of the millennium1 – is a form of pricing-to-market, where exporters set prices in the currency of their respective local export market. Theoretically as well as empirically in international trade and finance, global market segmentation (to the extent it exists due to transportation and related costs of crossing oceans and national borders) in the goods (and services) market enables ‘pricing-to-market’ behaviour by monopolistically competitive firms – a term coined by Krugman (1987). Market segmentation allows price discrimination In the remainder of this column, I shall try to explain, in turn, each of these three possible reasons behind Putin’s announcement. The combination of these three factors, and especially the final one, might potentially enhance the international role of the rouble. As a consequence, the move could boost demand for roubles in international forex markets, in particular by forcing the West to allow gas and oil buyers a way to purchase roubles under the current sanction regime, and thus – presumably – a way for Russia and its central bank to sell those roubles. A shift of the exchange-rate risk from Gazprom as exporter to its importer counterparties in the ‘unfriendly’ countries, which could potentially result in rising energy costs if the rouble gains value in a medium-to-longer run.Market segmentation, arising from obstacles to the formation of a unique global market with a single price for a product (in this case, gas), allows monopolistically competitive firms (such as Gazprom in this case) to operate pricing-to-market strategies by choice of the currency of pricing in international transactions for each such segmented market.Why might Putin have made this announcement? At least three key possible reasons come to mind, all related to well-known theoretical and empirical work in international monetary economics: The sanctions included, notably, the exclusion from the SWIFT bank messaging system of selected Russian banks and the freezing of assets of the Bank of Russia, the country’s central bank, coupled with subsequent restrictions on the wealth and movement of some Russian oligarchs. This move was a reaction to the sanctions these countries had agreed on quickly in response to the invasion of Ukraine by Russia on 24 February 2022. On 23 March 2022, President Putin puzzled the world, and international economists, with the apparently strange announcement that ‘unfriendly’ countries would have to pay for Russian gas (and, perhaps, oil too in the near future) in Russian roubles.
0 Comments
Leave a Reply. |