Mikhail Mamonov and Anna Pestova from the Charles University in Prague will present two papers on the effect of sanctions on Russia, in this seminar chaired by Thorsten Beck, director of the Florence School of Banking and Finance.
As part of the Florence School of Banking and Finance and the Robert Schuman Centre’ ongoing effort to highlight Ukraine’s struggle against the Russian aggression and understand what works and what does not in sanctions against Russia, as a part of the seminar series Finance in the Tuscan Hills we present two papers that econometrically assesses the impact on Russia’s financial sector and the macroeconomy.
Abstracts
"Crime and Punishment?" How Russian Banks Anticipated and Dealt with Global Financial Sanctions
by Mikhail Mamonov, Steven Ongena, Anna Pestova
We study the impact of global financial sanctions on the Russian banks and economy. Financial sanctions were consecutively imposed between 2014 and 2019, allowing potentially-targeted (but not yet sanctioned) banks to adjust their international and domestic exposures. Compared to similar other banks, targeted banks immediately reduced their foreign assets. Yet, to deal with considerable domestic depositor withdrawals, targeted banks at first actually expanded their foreign liabilities. Once sanctioned, however, banks not only further reduced their foreign assets but also started to decrease their foreign liabilities as well. Despite the introduction of government support the sanctioned banks substantially contracted their lending to the domestic corporate sector resulting in a potential loss in domestic GDP of at least four percent. However, at the same time the sanctioned banks increased household lending by almost the same magnitude, mostly offsetting the loss in GDP. Finally, unique hand-collected board membership and location data coupled with a two-stage difference-in-differences approach that flexibly addresses potential treatment diffusion allows us to show that throughout this period state-controlled banks were not all equally recognized as potential sanction targets.
Sorry, You’re Blocked. Economic Effects of Financial Sanctions on the Russian Economy
by Mikhail Mamonov and Anna Pestova
How large are the macroeconomic effects of financial sanctions and how one can distinguish the sanction shocks from other aggregate shocks affecting the economy at the same time? We employ a Bayesian (S)VAR model to estimate the effects of the Western financial sanctions imposed on the Russian economy in 2014 (first wave) and 2017 (second wave). The sanctions decreased the Russia’s corporate external debt and raised the country spread, but their effects were confounded by falling oil prices in 2014 (negative terms-of-trade, TOT, shock) and rising oil prices in 2017. We begin disentangling the sanction and TOT effects with a conditional forecasting approach, in which we simulate pseudo out-of-sample projections of domestic macroeconomic variables conditioned (i) solely on the oil price changes and then (ii) on both oil prices and external debt deleveraging. For each endogenous variable, we treat the difference between the two projections as the effect of sanctions. We then apply a structural approach to identify sanction shocks. Our results consistently indicate that the sanction effects were negative and non-negligible across the two sanction waves, being sizeable for the financial variables (real interest rate and corporate external debt) and moderate for the real variables (output, consumption, investment, trade balance, and the ruble real exchange rate). We argue that the estimated effects of sanctions are in line with the theoretical predictions from the literature on country spread shocks in open economies.