Estimation of Risk Spillovers Between Russian Financial Markets in the 2022-2023 Sanctions Period by Wavelet Coherence Analysis

Abstract

This paper investigates the impact of European Union sanctions on Russian economy during 2022–2023, with a focus on the oil and gas sector. Given the limited availability of Russian macroeconomic data, financial markets serve as key indicators of economic responses to sanctions. Utilizing wavelet coherence analysis (WCA), this study examines contagion effects between the Russian stock market, government bond market, and foreign exchange market to identify vulnerability and transmission of uncertainty. Unlike traditional econometric models such as GARCH, WCA captures the time-varying nature and statistical significance of co-movements between markets across different time horizons, offering a nuanced perspective on short- and medium-term dynamics. The findings reveal that the sixth EU sanctions package in mid-2022 triggered short-term volatility spillovers from the bond market to both equities and the exchange rate. A more complex pattern emerged in autumn 2022, where coherence between equity and debt markets intensified, though it remains difficult to disentangle the effects of the eighth sanctions package from concurrent political developments. In early 2023, the oil price cap introduced renewed volatility, primarily transmitted from the foreign exchange market to the bond and equity markets within days. However, by the end of 2023, markets showed signs of stabilization, suggesting a degree of adaptation by the Russian economy. This study highlights the evolving nature of sanctions' impact and the effectiveness of WCA in tracing financial contagion in turbulent geopolitical contexts.