Spillovers from Russia to Neighboring Countries: Transmission Channels and Policy Options
SpilloversfromRussiatoNeighboringCountries:TransmissionChannelsandPolicyOptions ShantArzoumanianWP/23/185 IMFWorkingPapersdescriberesearchinprogressbytheauthor(s)andarepublishedtoelicitcommentsandtoencouragedebate. TheviewsexpressedinIMFWorkingPapersarethoseoftheauthor(s)anddonotnecessarilyrepresenttheviewsoftheIMF,itsExecutiveBoard,orIMFmanagement. 2023 SEP ©2023InternationalMonetaryFundWP/23/185 IMFWorkingPaper MiddleEastandCentralAsiaDepartment SpilloversfromRussiatoNeighboringCountries:TransmissionChannelsandPolicyOptionsPreparedbyShantArzoumanian* AuthorizedfordistributionbyNicolasR.F.Blancher September2023 IMFWorkingPapersdescriberesearchinprogressbytheauthor(s)andarepublishedtoelicitcommentsandtoencouragedebate.TheviewsexpressedinIMFWorkingPapersarethoseoftheauthor(s)anddonotnecessarilyrepresenttheviewsoftheIMF,itsExecutiveBoard,orIMFmanagement. ABSTRACT:ThispaperstudieshowoutputfluctuationsinRussiaaretransmittedinternationally.Usingvectorautoregression(VAR)anddynamicpanelmodels,thepaperfindsthatRussia’soutputfluctuationsareanimportantdriverofoutputfluctuationsofcountriesintheregion,especiallyforoilimporters,andaretransmittedincreasinglyviatradeandmarketconfidencechannels.Themagnitudeofcross-borderspilloversislargerforcountrieswithrelativelyhighbilateraltradeconcentration,lowexportdiversification,andweakexternalbuffers.Thepaperalsofindsevidencethatstrongerpublicinstitutionalquality-especiallyinthefiscalarea-mayhelpinsulatecountriesfromvolatilityintheRussiansovereigndebtmarket. RECOMMENDEDCITATION:Arzoumanian,Shant.2023.“SpilloversfromRussiatoNeighboringCountries:TransmissionChannelsandPolicyOptions”.IMFWorkingPaper23/185 JELClassificationNumbers: F1,F3,F4,E3,E32 Keywords: Spillovers;internationalbusinesscycles;trade;remittances;FDI;marketconfidence;emergingmarkets Author’sE-MailAddress: SArzoumanian@imf.org *IwouldliketothankOlivierBasdevant,OlivierBizimana,NicolasBlancher,AlejandroHajdenberg,JetaMenkulasi,andparticipantsfromanMCDhybridseminarfortheirhelpfulcomments. WORKINGPAPERS SpilloversfromRussiatoNeighboringCountries:TransmissionChannelsandPolicyOptions PreparedbyShantArzoumanian Contents EXECUTIVESUMMARY4 1.INTRODUCTION5 2.LITERATURE6 3.STYLIZEDFACTS8 3.1TradeLinkages8 3.2FinancialLinkages9 3.3Remittances11 3.4ExchangeRates12 4.OVERALLBUSINESSCYCLECO-MOVEMENTS12 4.1VARResults15 4.2PanelResults19 5.TRANSMISSIONCHANNELS20 5.1TradeChannel20 5.2FinancialChannel21 5.3RemittanceChannel23 5.4Combined24 6.THEROLEOFDIVERSIFICATION,INTEGRATION,ANDINSTITUTIONS25 7.CONCLUSION33REFERENCES42 FIGURES Figure1.TradeLinkageswithRussia8Figure2.ExportstoRussiabyProduct9Figure3.ImportsfromRussiabyProduct9Figure4.Cross-BorderFinancialLinkages10Figure5.CorrelationBetweenRussianandDomesticSovereignBondSpreads10Figure6.RemittancesfromRussia11Figure7.PersonalRemittanceFlowsfromRussia11Figure8.NationalCurrencyperUSD12Figure9.OutputGapinRussiaandCISCountries13Figure10.ImpactofShockstoRussianGrowthonCISEconomies15Figure11.ImpactofShockstoEUGrowthonCISEconomies17Figure12.ForecastErrorVarianceDecompositionofGrowthinCISCountries18 Figure13.CorrelationBetweenGDPGrowthinRussiaandBilateralExports20Figure14.PublicGovernanceandSovereignCreditSpreads27Figure15.RoleofDiversification,Integration,andInstitutions27Figure16.PartnerDiversificationDampensthePassthroughoftheRussianBusinessCycle31Figure17.ImprovingResiliencetoExternalShocks32 TABLES Table1.DriversofShort-termGrowth—Overall:2004–202120Table2.DriversofShort-termGrowth—TradeChannel:2004–202121Table3.DriversofShort-termGrowth—FinancialChannel:2004-202122Table4.DriversofShort-termGrowth—RemittanceChannel:2010-202124Table5.DriversofShort-termGrowth—Combined:2010-202125Table6.DeterminantsofBusinessCycleTransmission30 ANNEXES AnnexI.DataDefinitionsandSources34AnnexII.ImpactofShockstoRussiaandEUGrowthonCISEconomies36AnnexIII.AlternativePanelSpecifications40 ExecutiveSummary ThispaperstudieshowoutputfluctuationsinRussiaaretransmittedinternationally.Usingvectorautoregression(VAR)anddynamicpanelmodels,thepaperfindsthatRussia’soutputfluctuationsareanimportantdriverofoutputfluctuationsofcountriesintheregion,especiallyforoilimporters,andaretransmittedincreasinglyviatradeandmarketconfidencechannels.Themagnitudeofcross-borderspilloversislargerforcountrieswithrelativelyhighbilateraltradeconcentration,lowexportdiversification,andweakexternalbuffers.Thepaperalsofindsevidencethatstrongerpublicinstitutionalquality-especiallyinthefiscalarea-mayhelpinsulatecountriesfromvolatilityintheRussiansovereigndebtmarket. 1.Introduction HowdorecessionsinRussiaaffectneighboringcountries?Andhowcanpoliciesdampentheireffects?Russia’sinvasionofUkraineandinternationalsanctionsagainstRussiahaverenewedinterestinthesequestions.SinceRussia’seconomyissubjecttoincreaseduncertainty,understandinghoweconomicshocksfromRussiaaretransmittedinternationallyandhowtheirimpactcanbecontainedhavebecomecentraltothepolicyagendaofneighboringcountries,suchasCommonwealthofIndependentStates(CIS)countries. CIScountrieswerepartoftheSo
