How changes in oil prices affect the economies of oil exporting (importing) countries: BRICS analysis

It cannot be denied that nowadays the world's energy needs are increasingly met by natural gas and coal, as well as renewable energy sources. However, crude oil remains a critical source which accounts for 31.6% of total energy consumption in 2022, according to the Statistical Review of World Energy. For this reason, the impact of oil price volatility remains an important research issue. First, rise in oil prices increases production costs, thereby reducing corporate profits and cash flows. Second, inflationary pressures caused by oil price changes may affect central banks' interest rate decisions as well as investor or consumer confidence. As a result, changes in the investment decisions of economic agents affect the value of assets, for example, the return of the stock market. Third, oil price shocks can affect macroeconomic variables and therefore the discounted cash flows on which stock market capitalization is determined.

One of the most long-term trends in global development is the creation of favorable conditions for the socio-economic development of countries which do not depend on the scale of their territories or geopolitical influence on the world stage. Nowadays this issue is especially relevant for any state to ensure economic growth in conditions of high unprecedented uncertainty. In the same context, issues related to the interaction and merger of the Shanghai Cooperation Organization (SCO) and the interstate association BRICS (Brazil, Russia, India, China, South Africa) are significant. This topic was raised by Kassym-Jomart Tokayev in his speech at the XV BRICS summit (August 2023), noting the interaction between the SCO and BRICS in a variety of areas, including in the field of digitalization, which calls for combining the achievements of the participating countries. Tokayev also noted that “Kazakhstan would like to contribute to the development of the BRICS’ potential as a member state.” Kazakhstan explores opportunities for joining BRICS, which in fact is a manifestation of economic pragmatism. Kazakhstan’s trade turnover with the BRICS countries in 2022 amounted to 53.2 billion US dollars, which is almost 40% of the country’s total trade turnover. So, Kazakhstan’s entry into the association will further increase these indicators. In addition, the expansion of the BRICS members is associated with a course towards de-dollarization, which will also have a positive impact on Kazakhstan.

In light of recent events, research on the impact of global shocks on the BRICS countries is becoming relevant for Kazakhstan. In particular, the paper (Caporale et al., 2022) examines how fluctuations in oil prices and exchange rates affect a group of emerging economies (EM), in particular, the BRICS and Turkey (BRICS-T) stock markets from 2001 to 2021.

The study is interesting for Kazakhstan in several directions. Firstly, at the present stage, the countries studied in the article are among the largest trading partners of Kazakhstan (except Brazil and South Africa). Thus, the changes taking place in these countries somehow have either positive or negative impact on the Kazakhstan economy. Accordingly, an important aspect for Kazakhstan is knowledge and analysis of transmission channel data. Secondly, the article provides a separate analysis of the impact of oil price volatility for oil-exporting and oil-importing countries. As one of the main export products of Kazakhstan is oil, it becomes significant to study how changes in oil prices affect the performance of exporters of this type of raw material. Thirdly, since countries that are members of different organizations and associations are in the closest economic connection, various shocks occurring within countries are transmitted to them to the greatest extent. Therefore, for Kazakhstan, which strives to become part of BRICS in the future, it is necessary to understand how the country’s economy can be affected by some external effects.

As noted, the number of countries studied in this article include both oil importers (China, India, South Africa and Turkey) and oil exporters (Russia and Brazil). This allows us to analyze the differences between these two types of economies with different trading patterns. The study is also special in that it uses industry rather than aggregate data. Thus, the article shows not how economies as a whole feel about oil price volatility, but how sensitive industries such as chemicals, energy, financial services, manufacturing and transportation are to oil price shocks.

Research has shown that in all examined countries, exchange rate returns affect most sectors more than oil price returns. In terms of oil price volatility, in all countries except India, the energy sector is significantly and positively impacted by oil prices. At the same time, there is a considerable difference in the impact of oil prices on the energy sector. Thus, with the exception of South Africa, oil exporters are exposed to a much greater impact on the energy sector from oil price fluctuations than oil importers.

Volatility in oil prices negatively affects the financial sector of all countries, with the exception of Russia, since the impact of oil prices in this sector in Russia changes over time, and can be either positive or negative. The financial sectors in South Africa and Brazil are most affected. Oil prices do not affect the transport sectors of Brazil, China and South Africa, but have a negative impact on the transport sectors of India and Turkey, and a positive impact on Russia. The impact of oil price fluctuations on the chemical sector was positive in South Africa, Russia and China and negative in India and Brazil. At the same time, oil price volatility is insignificant for the Turkish chemical sector.

Finally, the results show that global events such as the 2008 global financial crisis and the current COVID-19 pandemic (thus, the geopolitical shocks of 2022) tend to increase the impact of oil prices and exchange rates on stock returns. This is especially true for sectors that are heavily dependent on energy, as they are particularly vulnerable to risks associated with changes in global market conditions. The authors note that since energy-dependent industries are vulnerable to global instability, appropriate energy regulations must be introduced to reduce risks.