Abstract

This article analyzes financial market reactions to the Russia-Ukraine war with a focus on the opening weeks. Markets did not completely anticipate the war, and asset price reactions strengthened from the first week—when there were hopes for a quick resolution—to the second week, when prices generally peaked and began to partially revert to prewar values. Exposure to commodity trade and trade with Russia and Ukraine determined market perceptions of the riskiness of equity and foreign exchange assets. Credit default swap prices on sovereign debt and breakeven inflation rates indicate that markets saw the war as a measurable fiscal risk even for nonbelligerents.

Christopher J. Neely is a vice president and economist at the Federal Reserve Bank of St. Louis. The author thanks Samuel Jordan-Wood, Jason Dunn, and Adin Hammond for research assistance. 

INTRODUCTION

The February 2022 Russian invasion of Ukraine whipsawed the global economy in the midst of its recovery from the unprecedented COVID-19 pandemic. In response, international organizations, countries, and many private firms restricted trade and financial transactions with the Russian economy. Both Russia and Ukraine are important commodity exporters, so the disruptions from the conflict and the sanctions and countersanctions have roiled commodity markets, particularly oil, but also palladium and wheat, as well as other financial markets. This article examines the impact of the war on financial markets. 

This article focuses on the first few weeks of the war because asset price changes indicate that financial market expectations about the length and economic repercussions of the war changed substantially during this time. Such changes in expectations were consistent across several asset classes: equity, foreign exchange, and commodities. 

The financial market reactions to the war are important because financial markets provide a useful lens through which to understand how the war, the sanctions, and countersanctions have affected the cost of living and real activity around the world. For example, the global price of oil rose by about 35 percent from February 21, 2022, to March 8, 2022, which translated into a 20 percent increase in U.S. gasoline prices from February to March. Sharp increases in the price of oil have preceded 10 of the past 11 recessions, where the COVID-19 recession was the exception (Hamilton, 1996, 2011). 

More generally, an informal analysis of the asset price patterns illustrates how geography and trade patterns determined relative risk and returns within asset classes. For example, currencies of commodity-exporting countries strengthened relative to other currencies. Unsurprisingly, stocks from commodity-producing industries, such as oil companies, tended to outperform the market, while stocks of firms that buy commodities as intermediate inputs tended to underperform the market. More surprisingly, this article illustrates that the war probably substantially increased market perceptions of fiscal risks for G7 countries, as measured by credit default swaps (CDSs) on sovereign bonds and breakeven inflation expectations. 

As the war began only months before this article was finalized, there is little previous literature to discuss, although this article will tie in with contemporaneous research when appropriate. Three early and wide-ranging studies of the impact of the war have been those of the International Monetary Fund (2022a,b) and the World Bank (2022). Neely (2022) looks at oil price hikes from the war and their relation to U.S. gasoline prices. Neely and Jordan-Wood (2022) describe the sensitivity and returns of individual U.S. stocks to the price of a basket of commodities.

This article focuses on drawing informal inference from financial market reactions to the war, with only limited discussion of the macroeconomic effects. The article does not specifically examine the tremendous human toll that the war has taken on the people of the region or the suffering that high food prices will impose on people in poor, grain-importing countries. While this article briefly reviews military developments, it does not consider such events in depth or for their own sake.

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