Financial stress in Russia: Exploring the impact of oil market shocks

Oil market shocks significantly influence the financial and macroeconomic performance of resource-rich economies, serving as a critical anchor for their economic stability and growth. Russia is a significant exporter of oil and is geopolitically exposed; we examine the response of financial stress levels to decomposed oil market shocks, namely supply-side shocks, demand-side shocks, and financial risk exposures, during the period from July 13, 2012 to June 30, 2022, considering periods of historically abrupt oil price movements. We employ several econometric approaches to estimate our model, including the Cross-Quantilogram approach (CQ), Cross-spectral quantile coherency technique, and Time-varying parameter VAR model with stochastic volatility. Our findings reveal a robust intensification of financial stress in the Russian financial market when oil prices rise due to supply and demand shocks in the short term. Conversely, negative oil price shocks tend to diminish financial stress in the long run. Furthermore, our dynamic analysis indicates that the Russia-Ukraine conflict led to an increase in financial stress caused by oil market shocks, although the effect was comparatively weaker than during the US shale boom. Based on our research, we present several policy implications to address the identified challenges and promote financial stability in the face of oil market volatility.