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The impact of the Ukraine-Russia conflict on the financial markets

Lynn Doughane

L’impact du conflit Ukraine-Russie sur les marchés financiers

It has been more than a month since the world awoke to the news of a Russian attack in Ukraine. We have seen not only incalculable damage in terms of human lives, human capital and infrastructure, but also instability in the financial markets.

Markets tend to react to geopolitical risks, so Federal Reserve economists Dario Caldara and Matteo Iacoviello recently constructed a Geopolitical Risk Index (GPR) to compare events at different times. This index is based on real time reports in the news about war threats, terrorist threats, military build-ups, nuclear threats, acts of terror, war starts, escalations, etc.

Below we can see the daily data, going back more than 40 years. The most remarkable peaks highlight respectively the 1991 Gulf War, the 9/11 event, the start of the Iraq war in March 2003, the London bombings of July 2005, and now the invasion of Ukraine. However, it is believed that we have still not reached the level of geopolitical risk that we experienced in the aftermath of 9/11.

Figure 1: The Geopolitical Risk Index

High geopolitical risk has been shown to increase investor uncertainty, leading to lower stock prices and other financial assets. The correlation with stock market uncertainty is particularly clear in the chart below, which compares the GPR to the VIX indicator of stock market volatility, sometimes called the “fear gauge” by market participants.

The daily GPR is shown in orange, while the other two versions that track threat risk and geopolitical actions are shown in red and green, respectively. Essentially, all of these indices moved in the same direction. As we can see, these indices and the VIX rose in November after satellite images first showed the build-up of Russian troops on the border with Ukraine. The other peaks correspond to January 26, the date of NATO’s written response to the Russians, and the beginning of the invasion on February 24.

Figure 2: Geopolitical risk and stock market volatility

The surge in commodities

It is the energy and oil markets in particular that are reacting to geopolitical risk. Given Russia’s considerable importance as an oil exporter, energy prices have been particularly affected by this war. Brent crude is currently trading at around USD 116 (£88) a barrel, up from over USD 130 a few weeks ago. This will impact everything from corporate cash flow to gas prices for consumers, creating inflationary pressure that helps cause recessions.

Since Russia and Ukraine are also major exporters of many other important commodities such as wheat, neon gas, palladium and sunflower oil, their prices have also skyrocketed – and are destined to continue to rise due to Western sanctions.

Figure 3: Comparison of commodity and asset prices since the invasion

On the other hand, safe havens in times of volatility are doing well. The price of gold is back on the rise after its remarkable rally in the early months of the pandemic. Bitcoin and other cryptocurrencies could benefit as they are a possible way for the Russians to circumvent sanctions.


Stock Markets

The reaction of stock markets to the war is more complex, as different markets have more or less exposure to different commodities than others. They also have different levels of exposure to the Russian stock market.

Using data going back to 1985, European countries are more correlated to the Russian market and therefore more vulnerable. For example, France, Germany, and the UK have a correlation of 0.45, 0.42, and 0.47 with Russia, where 1 would mean they move at the same rate and 0 would mean they do not influence each other at all. The United States, on the other hand, has a correlation of 0.26, while China’s, interestingly, is only 0.1. All of this is broadly consistent with the performance of the various stock markets since the invasion, as we can see in the figure below.

Figure 4: Comparison of stock markets

Finally, what about different types of companies? Different sectors performed very differently at the beginning of this crisis. Companies in the energy sector have done very well, for example (as have weapons manufacturers). Companies that sell consumer staples or more discretionary consumer products, ranging from Hi-fi equipment to movie tickets, have lost out on fears that consumers will have less to spend because of commodity inflation.

Figure 5: Comparison by sector

While there may be short-term winners, the interconnectedness of economies, the burden of sanctions and the costs of increased uncertainty will eventually impact all markets. This will affect household budgets, wages, and also pensions, whatever the final outcome, which remains largely unpredictable.



Bloomberg. (2022). Ukraine Update: EU Warns China Not to Interfere With Sanctions.

Business Times. (2022). Ukraine war : What explains the calm in global stock markets?

Reuters. (2022). S&P Global says Russia-Ukraine insurance losses could reach $35 billion.

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