Investment under stormy skies : the case of Russian firms during 2004-2016

Author / Creator

Altug, Sumru, author

Available as

Online

Summary

In this study, we examine the effects of uncertainty on investment decisions for the Russian economy. We employ an empirical specification where the dynamics of investment under uncertainty are cap...

In this study, we examine 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 with partial irreversibility and expandability which allows for significant episodes of investment and disinvestment. We employ a rich panel of Russian non-financial firms which is uniquely suited to studying the multitude of conflicting factors that have affected investment in Russia over the period 2004-2016. Despite episodes of positive net investment preceding the Global Financial Crisis, we find the existence of episodes of significant disinvestment for the Russian economy. First, we find that the Economic Policy Uncertainty (EPU) Index for Russia has a significant negative effect over the period 2004-2016. Second, in line with the prediction of the underlying model of investment, we find that the response of investment to demand shocks is dampened under greater economic policy uncertainty, as measured by an interaction term between sales growth and the EPU index. Next, we examine the heterogeneous effects of the ruble depreciation and oil price declines that occurred concurrently with the sanctions regime by exploiting the sectoral and firm-level variation in our micro level data set. We find significant negative effects of foreign exchange exposure through balance sheet effects of the ruble depreciation as well as of the indirect effects of trade linkages with sanctioning countries on the investment rate for Russian non-financial firms. Furthermore, firms in high oil-cost dependent sectors also experienced a lower decline in their investment rates as a result of the significant oil price decline that occurred in 2014. Thus, our study is able to identify the general equilibrium-like effects of exchange rate depreciation, sanctioned trade linkages or declines in the price of oil by exploiting the heterogeneous response of firms.

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