The 2014 Russia Shock and Its Effects on Italian Firms and Banks

We study how a demand shock in an export market propagates to the exporting country’s banking system. Using the dual shocks of sanctions and falling oil prices suffered by Russia in 2014, we investigate the effects on Italian firms and banks more exposed to the Russian market. This event implied a sharp decline in sales for firms with a significant share of sales to Russia, but it did not affect the overall amount of credit available to them. Banks relatively more exposed to Italian exporters to Russia cut their overall credit supply, especially vis-à-vis ex ante risky borrowers, but continued to provide credit towards firms moderately hit by the trade shock, in an attempt to let them cope with the liquidity shortfall. Our results suggest that banks mitigate trade shocks for certain hit firms, while at the same time propagate them to other firms not directly affected by the shock.