DP16646 Investment under Stormy Skies: The Case of Russian Firms during 2004-2016

Author(s): Sumru G. Altug, Sevcan Yesiltas
Publication Date: October 2021
Date Revised: November 2021
Keyword(s): Financing constraints, Firm-Level Data, Irreversible investment, oil prices, ruble devaluation, Russian Federation, sanctions, uncertainty
JEL(s): C33, D22, G31
Programme Areas: Macroeconomics and Growth
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=16646

In this study, we quantify the effects of uncertainty on investment decisions for the Russian economy. We employ an empirical specification where the dynamics of investment under uncertainty are captured by an error correction model of investment. We use a rich panel of Russian non-financial firms which is uniquely suited to studying investment in Russia over the period 2004-2016. We treat the sanctions regime instituted in 2014 against entities in Russia as a quasi-natural experiment. To control for the heterogeneous effects of the ruble devaluation and oil price decline that occurred concurrently with the sanctions regime, we exploit firm-level and sectoral variation in our micro level data set that covers both large firms and SMEs. We find significant negative effects of uncertainty on the response of investment to demand shocks due to the sanctions regime after isolating the effects of foreign exchange exposure that works through balance sheet channel of the ruble devaluation, the effects of the oil-cost dependence in production as well as of the indirect effects of trade linkages with sanctioning countries on the investment rate.