GLOBAL OIL PRICES, OIL INDUSTRY AND EQUITY RETURNS: RUSSIAN EXPERIENCE
| DOI | http://doi.org/10.1111/j.1467-9485.2010.00512.x |
| Date | 01 May 2010 |
| Author | Ramaprasad Bhar,Biljana Nikolova |
| Published date | 01 May 2010 |
GLOBAL OIL PRICES, OIL INDUSTRY
AND EQUITY RETURNS: RUSSIAN
EXPERIENCE
Ramaprasad Bhar
n
and Biljana Nikolova
nn
Abstract
The purpose of this paper is to promote a greater understanding of the implications
of oil price changes on the equity investment climate in Russia. A dynamic bivariate
exponential general autoregressiveconditional heteroscedastic (EGARCH) analysis
shows that global oil price returns have significant impact on Russian equity returns
and volatility. At the same time, a dynamic correlation analysis highlights Russia’s
importance in the international geopolitical scene and its positioning as a reliable
supplier of oil during times of turmoil in the Middle East. There are a number of
challenges, however, that threaten to slow down the performance of the oil industry
in Russia and compromise the country’s future economic growth and stock market
performance.
I Intro ductio n
The Russian economy has grown at an average rate of 6.7% year on year since
1999. The economic boom was mainly driven by surging commodity prices,
especially oil price increase, increased consumer spending and depreciation of
the rouble following the August 1998 financial crisis. Exports represented 30%
of Russia’s gross domestic produce (GDP) in 2001 and roughly 50% of the
export revenues came from energy. The share of oil alone was approximately
30% of total primary energy production and approximately 50% of primary
energy exports. According to the International Monetary Fund (IMF) and the
World Bank, the same relative revenue composition was evident in 2006.
Revenue from the energy sector represented 30–40% of the Russian federal
budget, with contribution of approximately 20% from the oil sector.
Russia’s energy sector was privatised in the period 1993–1998, which
coincided with the creation of the national stock exchange market in 1994.
Since its inauguration, the Russian stock exchange has been strongly dominated
by companies that operate in the oil and gas industry. In February 2008, total
market capitalisation of the Russian stock exchange was approximately US$1.3
n
The University of New South Wales
nn
The University of New South Wales
Scottish Journal of Political Economy, Vol. 57, No. 2, May 2010
r2010 The Authors
Journal compilation r2010 Scottish Economic Society. Published by Blackwell Publishing Ltd,
9600 Garsington Road, Oxford, OX4 2DQ, UK and 350 Main St, Malden, MA, 02148, USA
169
trillion, five
1
oil companies accounted for approximately 19% of the total
market capitalisation and a combination of 11
2
oil and gas companies
represented approximately 55% of the total market capitalisation. Given the
strong market concentration, financial underperformance of these companies
would have a strong negative impact on the Russian stock exchange. This
highlights the importance for international investors to understand the risks and
challenges associated with the financial performance of energy companies in
Russia, and in this paper, specifically, we focus on the impact of global oil prices
on Russian stock returns.
There is a large and growing literature on the relationship between oil and
stock prices. Jones and Kaul (1996) use a standard cashflow dividend valuation
model for the period 1947–1991 to test whether the reaction of international
stock markets to oil shocks can be justified by current and future changes in real
cashflows and/or changes in expected returns. They suggest that the reaction of
Canadian and US stock prices to oil price shocks can be completely accounted
for by the impact of these shocks on real cashflows, while the results for Japan
and the United Kingdom are not as strong. Sadorsky (1999) uses vector
autoregression (VAR) methodology to investigate the interaction among oil
prices, stock returns and economic activity. The results of this study suggest that
both oil price and oil price volatility play important roles in affecting real stock
returns, with an evidence of increasing impact since 1986. Faff and Brailsford
(1999) use a two-factor model to investigate the sensitivity of Australian
industry equity returns to an oil price factor, over and above the sensitivity to
market returns. The results suggest existence of a positive sensitivity for the Oil
and Gas and Diversified Resources industries and a significant negative
sensitivity for the Paper and Packaging and Transport industries. Boyer and
Filion (2007) take a more micro approach and use a multi-factor model to study
the determinants of stock returns of oil and gas corporations in Canada. They
identify five common economic factors: interest rates, exchange rate, market
returns, oil prices and natural gas prices, and five firm specific factors: proven
reserves, volume of production, debt level, operational cashflows and drilling
success, as strong determinants of returns of Canadian oil and gas corporations.
On the emerging markets front, Basher and Sadorsky (2006) use an international
multi-factor model, which allows for unconditional and conditional factors to
study the impact of oil price changes on a large set of emerging stock market
returns. They find strong evidence that oil price risk impacts stock price returns
in emerging markets. Goriaev and Zabotkin (2006) analyse the risk factors
driving stock returns specifically in the Russian equities market. The authors use
a multi-factor model comprising sectoral, emerging markets, world and
1
The selected oil companies are Lukoil, Tatneft, Rosneft, Gazprom Neft and TNK-BP. In
addition to oil, all of these companies generate income from gas, however, oil operations
represent predominant source of income (see company financial reports for further detail).
2
Companies listed on the Russian stock exchange, which represented approximately 55% of
the total market capitalization in February 2008, are Lukoil, Unified Energy Systems of Russia,
Tatneft, JSC Irkutskenergo, Mosenegro, Surgutneftegas, Rosneft, Gazprom, Novatek,
Gazprom Neft (previously Sibneft) and TNK-BP.
RAMAPRASAD BHAR AND BILJANA NIKOLOVA170
r2010 The Authors
Journal compilation r2010 Scottish Economic Society
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