Resources policy
The paper explores how sanctions targeting Russia have influenced the dynamics of financial markets, particularly focusing on the interconnections between oil and other major financial assets. The research question centers on whether the war and subsequent sanctions have altered the patterns of risk spillovers and financial connectedness, with oil as a focal point of the analysis.
The authors employ high-frequency (intra-day) data and utilize a time-varying parameter vector autoregressive (TVP-VAR) model to measure the changes in connectedness between oil and other financial assets, including bonds, bitcoin, gold, stocks, and the U.S. dollar. By comparing pre-war and wartime data, they assess how sanctions, geopolitical tensions, and disruptions in energy supply chains have shifted these relationships.
The results indicate a significant increase in the connectedness among financial assets during the war compared to the pre-war period. Prior to the conflict, oil primarily acted as a net receiver of spillovers from other markets, reflecting its dependency on broader financial conditions. However, during the war, oil became a dominant net transmitter of risk to other assets, underscoring the centrality of energy markets in financial turbulence caused by sanctions. The findings also reveal heightened volatility in global markets, with assets like the U.S. dollar and gold showing increased sensitivity to oil prices. These changes reflect the critical role of sanctions in reshaping global financial dynamics, particularly as oil prices reached their highest levels in eight years due to disruptions in Russian exports. The policy implications emphasize the need for coordinated international measures to stabilize financial markets during crises. The findings suggest that energy-dependent economies should prioritize diversifying energy sources and building market resilience to mitigate the impact of supply shocks. Additionally, targeted financial interventions, such as interest rate adjustments, could help reduce the cascading effects of increased market connectedness during geopolitical conflicts. By addressing these vulnerabilities, policymakers can better manage the unintended economic consequences of sanctions while maintaining pressure on targeted states.
Read the full article.