Impact of oil price shocks on the Russian stock market

The response of financial markets to oil price changes depends on whether these fluctuations are driven by oil supply shocks or oil demand shocks. This paper is concerned with testing these relationships for Russia, which is the world\u27s largest crude oil producer. We decompose oil price shocks into oil supply, aggregate demand and oilspecific demand shocks, following the methodology of Robert Barsky and Lutz Kilian, and identify structural relationships between these shocks and the Russian stock market. This approach enables us to use a structural vector autoregressive framework to analyze the impact of each of the oil price shocks on stock market variables. We determine that oil price shocks explain over one-third of variation in the Russian stock market in the long run. Stock prices of net oil producers, generally, benefit from shocks driven by the demand for oil, but are less affected by oil supply shocks. Net oil consumers, on average, are more responsive to oil supply shocks than net oil producers. On the aggregate level, we determine that oil demand shocks have a positive relationship with Russian equity returns. These results have implications for investors\u27 portfolio choices, and contribute to building a consensus showing that financial markets of oilexporting economies benefit from higher oil prices