The Cost of Sanctions: Western Sanctions' Impact on Russian Financial Markets during the Russia/Ukraine Crisis in 2014-2015
Abstract: This thesis investigates the effect of the US and the EU sanctions on the Russian financial markets during the Russia/Ukraine crisis in 2014-2015. The success of various types of international sanctions is a long debated question that could not be answered definitely thus far. To shed more light on the topic we take a new approach by looking at the impact of the sanctions on the main Russian stock market index in RUB (MICEX) and the exchange rate (RUB/USD) and try to identify to what extent the recent drop in Russian stock market in USD of over 40% can be explained by the sanctions. We construct a unique sanctions' index in order to test whether a relationship between the reactions in the financial markets and the sanctions can be established, while controlling for other market factors, such as oil price, government bond yields and major global equity indices. Our results show that the stock market reacted ambiguously to the US sanctions and related sanctions' triggering events and negatively to the EU sanctions and related events, which we explain mainly by the varying complex market expectations. The sharp fall in the ruble, that explains most of the downturn in the USD quoted Russian equity index (RTS), cannot be linked to the sanctions, but is instead closely connected to the coinciding decrease in the oil prices.
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