Impact of Sanctions on Efficiency of Financial Market in Russia

The proposed study is aimed to investigate the impact of sanctions on Russian financial market efficiency. The new sanctions which are imposed against Russia starting from February 2022 are characterized by the rapid introduction of measures, high intensity of implementation, and a wide range of goals. Their effectiveness is a relevant topic in the public policy dispute. Thus, in this project I intend to conduct my own research on the impact of announcements of the imposition of sanctions (period 2022-2023) on the profitability of shares of companies listed on the MOEX that were subject to sanctions. The empirical evidence consistently reveals that sanctions and related events induce increased market volatility, diminished investor confidence, and abnormal market reactions, indicative of declining market efficiency. Employing various econometric methods, such as event study approaches and regression analysis, emphasizes the necessity of comprehending the broader economic and geopolitical landscape in assessing market efficiency. A hypothesis is made that, despite political and economic factors, sanctions significantly impact the efficiency of the Russian financial market. While the market is expected to maintain weak form efficiency in the long-run, it is hypothesized that weak-form inefficiencies will emerge in the short run as well as it is expected to find the evidence of structural break. This is due to the specific restrictions imposed by sanctions, which create information asymmetries and hinder the smooth adjustment of stock prices to new information. Additionally, the hypothesis includes that the Russian market will be particularly sensitive to negative news, especially related to sanctions, leading to more pronounced inefficiencies. Furthermore, focusing specifically on firms from various industries within the Russian market, it is expected that firms from the same industries will exhibit similar trends. To perform this task, I analyzed the previous studies which fell into three main categories: the papers devoted to market efficiency, the ones which studied the impact of sanctions on the market efficiency, and studies exploring overall effect of sanctions on the economy. This allowed me to obtain general understanding of the context of my work and provide me with technics which can be implemented in my own research. The study found strong evidence that the Russian stock market violated weak-form efficiency around the time of sanctions imposed in February 2022, with many companies rejecting the null hypothesis of a random walk process during that period according to the ADF test. The Chow test detected significant structural breaks in stock prices for several major companies like AFKS, ALRS, CHMF, CIAN, MOEX, OZON, PIKK, VTBR and YNDX around the sanctions event. Regression analysis showed the Russian market index return, currency fluctuations, lagged returns, and monetary policy rates were significant predictors of stock returns, rejecting the null that sanctions had no impact on return relationships. This evidence indicates the sanctions created predictability in Russian stocks, violating market efficiency and allowing potential profits from technical trading strategies during that turbulent period.