Spillovers from Russia to Neighboring Countries: Transmission Channels and Policy Options

Spillovers from Russia to Neighboring Countries: Transmission Channels and Policy Options Shant Arzoumanian WP/23/185IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management. 2023SEP *I would like to thank Olivier Basdevant, Olivier Bizimana, Nicolas Blancher, Alejandro Hajdenberg, Jeta Menkulasi, and participantsfrom an MCD hybrid seminar for their helpful comments.© 2023 International Monetary Fund WP/23/185IMF Working Paper Middle East and Central Asia Department Spillovers from Russia to Neighboring Countries: Transmission Channels and Policy Options Prepared by Shant Arzoumanian* Authorized for distribution by Nicolas R. F. Blancher September 2023 IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management. ABSTRACT: This paper studies how output fluctuations in Russia are transmitted internationally. Using vector autoregression (VAR) and dynamic panel models, the paper finds that Russia’s output fluctuations are an important driver of output fluctuations of countries in the region, especially for oil importers, and are transmitted increasingly via trade and market confidence channels. The magnitude of cross-border spillovers is larger for countries with relatively high bilateral trade concentration, low export diversification, and weak external buffers. The paper also finds evidence that stronger public institutional quality- especially in the fiscal area- may help insulate countries from volatility in the Russian sovereign debt market. RECOMMENDED CITATION: Arzoumanian, Shant. 2023. “Spillovers from Russia to Neighboring Countries: Transmission Channels and Policy Options”. IMF Working Paper 23/185JEL Classification Numbers: F1, F3, F4, E3, E32 Keywords: Spillovers; international business cycles; trade; remittances; FDI; market confidence; emerging markets Author’s E-Mail Address: SArzoumanian@imf.org WORKING PAPERS Spillovers from Russia to Neighboring Countries: Transmission Channels and Policy Options Prepared by Shant Arzoumanian IMF WORKING PAPERS Spillovers from Russia to Neighboring Countries: Transmission Channels and Policy Options INTERNATIONAL MONETARY FUND 2 Contents EXECUTIVE SUMMARY ___________________________________________________________________________ 4 1.INTRODUCTION _______________________________________________________________________________ 52. LITERATURE ___________________________________________________________________________________ 63. STYLIZED FACTS _______________________________________________________________________________ 83.1 Trade Linkages _________________________________________________________________________________ 83.2 Financial Linkages _____________________________________________________________________________ 93.3 Remittances __________________________________________________________________________________ 113.4 Exchange Rates _______________________________________________________________________________ 124. OVERALL BUSINESS CYCLE CO-MOVEMENTS ______________________________________________ 124.1 VAR Results ___________________________________________________________________________________ 154.2 Panel Results _________________________________________________________________________________ 195. TRANSMISSION CHANNELS _________________________________________________________________ 205.1 Trade Channel ________________________________________________________________________________ 205.2 Financial Channel _____________________________________________________________________________ 215.3 Remittance Channel __________________________________________________________________________ 235.4 Combined ____________________________________________________________________________________ 246. THE ROLE OF DIVERSIFICATION, INTEGRATION, AND INSTITUTIONS ___________________ 257. CONCLUSION _________________________________________________________________________________ 33REFERENCES _____________________________________________________________________________________ 42 FIGURES Figure 1. Trade Linkages with Russia _________________________________________________________________________ 8 Figure 2. Exports to Russia by Product _______________________________________________________________________ 9 Figure 3. Imports from Russia by Product ____________________________________________________________________ 9 Figure 4. Cross-Border Financial Linkages ___________________________________________________________________ 10 Figure 5. Correlation Between Russian and Domestic Sovereign Bond Spreads ______