Impact of Western Sanctions on Russian Financial Markets: SVAR Analysis

Abstract

After the outbreak of the Ukraine crisis in 2014, Russia began to face economic sanctions from the West. Over time, Western sanctions have gradually expanded to various sectors such as individuals, institutions, industry, and trade. Western sanctions are expected to enlarge and prolong due to the outbreak of the Russo-U.S. war in 2022. Experts assessed those Western sanctions act as a risk factor for the Russian financial market, including increasing instability in the Russian financial market. In fact, Russian financial indicators fluctuated when new sanctions were introduced. Against this background, this study focused on the impact of Western sanctions on the Russian financial market. This study is significantly different from existing studies in that it isolates the direct impact of Western sanctions through the SVAR model using an index developed to quantitatively measure Western sanctions between 2014 and 2019. As a result of the analysis, the impact of Western sanctions was found to be very minimal. This is because the sanctions index was limited to EU sanctions, and the speed of expansion of sanctions during that period was relatively slow. The Russian financial market was found to have been more affected by factors indicating economic downturn such as an increase in the exchange rate and a decline in oil prices during that period.