The impact of international financial flows on exchange rate dynamics and balance of payments stability

Abstract

The relationship between cross-border capital movement and the state of a national economy's external equilibrium admits several competing interpretations, the divergence between which sharpens in periods when the direction of exchange rate dynamics departs from the direction of the current account balance. The study aims to quantify the contribution of balance of payments components to the dynamics of the rouble exchange rate and to identify the conditions under which cross-border financial flows determine the stability of external equilibrium to a greater extent than the current account balance. The information base comprises official estimates of the balance of payments and exchange rate statistics of the Bank of Russia for 2020-2026; the analytical part rests on an author's model of factor decomposition by the chain substitution method and on scenario sensitivity analysis. It is established that in 2024-2025 the direction of change in the current account balance and the direction of change in the average annual rouble rate diverge: a 33,9% contraction of the current surplus in 2025 was accompanied by a strengthening of the rouble and a 23,07% decline in the official dollar rate. The factor decomposition attributes more than half of the exchange rate shift to the interest rate differential and the regime of export revenue repatriation, that is, to parameters of the financial account, whereas the contribution of the trade balance turns out to be opposite in sign and smaller in magnitude. The resulting configuration shows that under restrictions on capital movement and the restructuring of payment infrastructure, exchange rate formation shifts from the trade contour to the financial one, and the stability of the balance of payments is determined by the manageability of financial account flows rather than by the size of the current surplus.