Expert Explains How Oil Shocks Affect Russian Economy

11:07, June 21, 2023

In his opinion, the country has been able to cope with the difficulties due to its high dependence on the price of oil

The dynamics of oil prices inevitably affect the international financial markets, but different countries experience the consequences of oil shocks differently, believes Kazi Sohag, Associate Professor at the Department of Economics of the Urals Federal University. The expert pointed out that dependence on oil makes Russia vulnerable on the one hand. On the other hand, it helps the country to cope with financial difficulties and sanctions pressure. He devoted his report "Shocks in the oil market and financial stress against the background of geopolitical risks in Russia" to the peculiarities of this situation at the XXIV Yasin (April) International Academic Conference on Economic and Social Development.

"The Russian economy has been able to withstand financial difficulties and sanctions pressure from Western countries precisely because of its high dependence on oil prices," Kazi Sohag points out.

This distinguishes the Russian economy from the European and American economies, which are based on a service sector that is very unstable and risky in terms of financial interests. Oil shocks affect the financial market in Russia differently than in Western countries.

In general, the expert notes, the global economy is used to crises.

"Looking at global financial market charts, one sees a series of alternating fluctuations," the researcher argues.

Since the abandonment of the gold standard, the link between the dollar and the price of oil has become a financial reality. The danger of the petrodollar system lies in its vulnerability to oil price fluctuations: when oil prices fall, investment falls, which can lead to financial market crises. In analyzing the effects of oil shocks, economists first look at what happens to personal spending and saving and to the stock market.

"The advent of plastic and credit cards allowed people to spend more, counting on their future income, which accelerated inflation," Kazi Sohag explained.

The study of stock market volatility and exchange rate analysis allows us to reflect the general state of the financial system, but in Russia these variables are not key.

"The Russian economy, being a commodity economy, is largely based not on the stock market but on the banking sector. It is heavily dependent on oil and gas exports, and these revenues play a significant role in the state's economic policy," the speaker noted.

During the negative supply shocks of 2015 and 2016, the Russian economy faced budget deficits. When world prices rose in 2018 and 2019, Russia received additional revenues. The largest budget deficit occurred in 2020, when the world economy experienced the largest negative oil shock. Standard measures to study financial stress (an indicator that assesses the degree of instability of economic indicators and the proximity of the financial system to a crisis. - Editor's note) are not applicable in Russia. The country's financial system is largely based on the distribution of budget revenues rather than on the behavior of consumers and private investors, the economist says. In his research, Kazi Sohag has developed his own index to assess the level of financial stress in the Russian economy. It includes more than 10 indicators, including stock market volatility, the level of financial institutions' return on assets, the spread of interbank lending rates, and the Central Bank of Russia's key rates.

"We have included the banking sector, which plays a huge role in the regional economy by providing loans. We have also included public finances, such as the National Welfare Fund, which is a kind of macro-credit for the Russian economy that can absorb any risks from external sources," the speaker lists.

The results of the study show how financial stress in the Russian economy correlates with fluctuations in oil prices. The probability of a crisis increases with abrupt changes in supply and demand in the oil market in the short term. Financial stress also increases with long-term risk in the oil market.

However, if oil prices change more smoothly, it will have less impact on the crisis trends in the economy. Since the Russian economy is mainly dependent on hydrocarbon exports and several key sectors of the real economy, it is able to absorb any external shocks very quickly, the economist believes.

The news article was translated by UrFU International Marketing Office. 
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