Economists: oil dependence has a dual impact on the Russian economy

13:09, December 27, 2023

Experts have studied how shocks in the oil market affected the financial system

Dependence on oil, on the one hand, makes the Russian economy vulnerable, and on the other, helps to cope with financial difficulties and sanctions pressure, experts from Russia and the UAE have found out. Researchers conducted a study in which they analyzed how oil price shocks from demand, supply and financial risks affect the level of financial stress. The data was studied for Russia for the period from 2012 to 2022. The results of the study were published in the journal Resources Policy. The work was carried out with financial support from the Russian Science Foundation (project No. 23-18-01065).

“The volatility of oil prices is influenced by restrictions on oil production volumes, demand surges, economic sanctions, increased geopolitical risks and market sentiment,” explains Kazi Sohag, a senior researcher at the UrFU School of Economics and Management. — Fluctuations in oil prices can cause volatility in the stock market. This is relevant for the Russian economy, since it largely depends on the income of the oil and gas industry.”

Thus, the likelihood of an economic crisis increases more than threefold with sharp changes in oil prices caused by movements in global supply and demand, economists believe. Speculation in the stock market can also lead to increased uncertainty throughout the financial system, but the impact is less pronounced than a supply and demand shock.

“When determining financial stress in the Russian economy, in addition to the main ten indicators of the financial system, including, for example, stock market volatility, inflation, exchange rates, return on assets of financial institutions, we also took into account that the Russian economy relies more on the banking sector and the distribution of budgetary income, and not on the behavior of consumers and private investors,” notes Irina Kalina, research engineer at the Laboratory of Economic Policy and Natural Resources at UrFU.

Experts also found that in the short term, when oil prices rose due to supply and demand shocks, there was a significant increase in financial stress in the Russian financial market. Conversely, negative oil price shocks had less financial stress over the long term.

In addition, the dynamic analysis showed that the Russian-Ukrainian conflict led to an increase in financial stress from one to five percentage points over a short period of time. Although the effect of the conflict was weaker than the consequences of the US shale boom in 2014, economists add.

“In 2022, the impact of oil price shocks on financial stress increased only in the early stages of the conflict. The impact of oil price shocks on the Russian financial system in 2022 is less pronounced compared to the events of 2014,” says Irina Kalina.

The authors believe that in 2014 Russia was not ready to overcome shocks. In 2022, political measures introduced by the state allowed the economy to smoothly adapt to new realities. Strengthening trade and economic relations with China and trade in resources in rubles significantly contributed to minimizing the impact of oil shocks on the Russian financial system.

“We assume that it was not the price of oil, but panic in the foreign exchange market that caused the fall in the ruble exchange rate and other shocks in the stock market. However, the policy of the Russian Government on restrictions on conversion and transactions with foreign currency, as well as an increase in the key rate to 20%, contributed to the strengthening of the Russian currency, protected the assets of the banking system, prevented a sharp rise in inflation and ultimately led to a reduction in financial stress. Moreover, the rise in oil prices in February 2022 and the absence of export restrictions, as well as the withdrawal of foreign companies from the market and the introduction of import sanctions, allowed the Russian economy to strengthen and prevent the devastating consequences of the crisis,” adds Kazi Sohag