As Russia’s war against Ukraine continues to unfold, its global economic impact remains uncertain. Evidence from the stock market indicates that firms with strong trade or ownership ties to Russia are more likely to face adverse consequences as the conflict wears on.
Wars cause severe economic damage over the long run. While it is too early to assess the long-term impact of Russia’s invasion of Ukraine from early 2022, it is clear that both Ukraine and most other European countries have already been affected acutely.
One way to judge the effects of the conflict is to look at financial markets. Asset prices can tell us things about the real economy. In general, analysing the immediate response of share prices can provide valuable insights into the potential long-term consequences of significant events like wars.
Share prices typically reflect the expectations of numerous well-informed people and businesses (such as banks and pension funds) on future economic prospects. Wars usually trigger a change in these expectations – and it’s not always a downward swing in prices. For example, the stock market responded positively to the invasion of Iraq in March 2003 as global investors saw it as ‘good’ news.
War can have varied effects on asset prices in general. But what about at the level of individual firms? A key question to ask is which types of company can expect their valuations to rise, and which others should anticipate a sustained fall.
In the case of the invasion of Ukraine, being closely connected to Russia makes a difference. Recent research evidence from the Centre for Economic Performance (CEP) reveals that firms with strong ties to Russia through trade or ownership experienced a substantial decrease in their cumulative return following the invasion. Although these effects may not be long lasting, they matter on a wider level.
The aggregate losses from dependence on Russia through trade linkages or ownership amount to 0.8 percentage points and 0.73 percentage points for the average country. This means that an aggregate stock market index based on firms in the CEP study’s sample fell by 1.53% in valuation for the average country due to international linkages to Russia. European countries are among the most affected, indicating the potential for significant long-term consequences for these nations.
Why are some firms dependent on Russia?
Today's interconnected global economy means that firms are linked in various ways, including through international trade and ownership. Using world input-output tables, which depict linkages between industries globally, it is possible to evaluate how specific industries – and thus firms – are dependent on Russian trade flows. More specifically, the total dependence of a particular industry on Russia can be measured by the weight of exports to Russia and imports from Russia within that industry’s total output.
For the countries in the CEP study’s sample, firms have an average dependence on Russia of 0.25%. This means that, on average, a firm with an output of $1 billion exports and imports from Russia goods amounting to $2.5 million.
But this figure conceals significant variation. While half of the companies in the sample have a dependence below 0.06%, the firms that are the most reliant on Russia have a dependence of 0.54%. The most dependent firms trade with Russia in proportion to their output almost ten times as much as the bottom half.
There is also considerable geographical variation. Dependence on Russia is highest in Europe, with an average dependence of 0.80%. In Europe, firms producing refined petroleum products such as gasoline are the most dependent, with an average dependence of 14.64%. So, for each $100 of output produced, they trade with Russia $14.64.
How did share prices change after the invasion?
Share price trends are revealing. Looking at cumulative asset returns in a short window around the Russian invasion of Ukraine gives us an indication of how share prices responded to the onset of the conflict.
Figure 1 illustrates the average cumulative return of firms by their trade and multinational linkages to Russia. The left-hand panel shows that the returns of the firms that are the most dependent on Russia were significantly lower than the returns of other firms around the time of the war. The right-hand panel demonstrates that firms that have a direct ownership link with Russia experienced lower cumulative returns at the onset of the conflict than firms not directly linked to Russia.
Figure 1: Average cumulative returns of firms, by Russia exposure level
Source: Authors’ calculations
What about differences between firms? A more thorough analysis comparing firms within the same country and industry – and controlling for other firm characteristics such as size – confirms these findings. Companies with international linkages to Russia saw a significant reduction in their cumulative returns.
As the cumulative returns are expressed in percentages, changes in the cumulative returns are expressed in percentage points. Those in the top 10% of total dependence on Russia experienced a decline in their returns of 2.16 percentage points with respect to other firms. So, a firm that is highly reliant on Russia valued £100 prior to the invasion would see its value drop by £2.16 compared with a firm of the same value but with no strong trade links with Russia.
Having an affiliate in Russia resulted in a decrease of 3.12 percentage points in cumulative returns. In this case, a firm with an affiliate in Russia, and valued at £100 prior to the invasion, would experience a drop in its value of £3.12 compared with a firm with no affiliate in Russia. There was no effect of having an affiliate in Ukraine on cumulative returns.
The CEP study also examines whether the effects differed between exports to Russia and imports of intermediates from Russia. The findings reveal that the effect on cumulative returns is almost exclusively driven by firms that are heavily reliant on Russian imports of intermediate inputs (such as fossil fuels or other raw materials like metals).
This suggests that investors expected more significant impacts on firm performance due to the difficulty of substituting input materials from Russia (such as gas), rather than the reduced access to the Russian export market.
How significant are these stock market losses?
According to our research, the average loss across countries was 0.8 percentage points through high trade exposure to Russia, with a median loss of 0.47 percentage points. For firms with an affiliate in Russia, the average loss amounted to 0.73 percentage points, and the median loss was 0.52 percentage points. The losses, operating through both channels, are substantial.
Geography plays a significant role in determining the magnitude of aggregate losses. Losses are concentrated in Europe: East European countries are among the most affected countries through trade linkages; and West European countries are the most affected through ownership linkages. In contrast, countries such as United States and China saw a relatively modest aggregate effect, as they are less closely linked to Russia through trade or ownership.
At the time of writing, the conflict in Ukraine is showing little sign of easing. This means that it is hard to assess the overall impact that the invasion will have on the global economy in the longer term. But looking at the share price fluctuations at the onset of the conflict highlights important immediate losses beyond Ukraine’s borders. These losses are especially important for European countries that are closely linked to Russia through trade and ownership. This also suggests a potentially important long-term economic impact for these countries.
Where can I find out more?
- Economic spillovers from the war in Ukraine: The proximity penalty: VoxEU column by Victor Sehn, Andre Meier, Gernot Müller and Jonathan Federle.
- War-induced food inflation imperils the poor: VoxEU column by Bob Rijkers, Guillermo Falcone, Guido Porto and Erhan Artuc.
- The indirect effect of the Russian-Ukrainian war through international linkages: early evidence from the stock market: CEP Discussion Paper by Marcus Biermann and Elsa Leromain.
Who are experts on this question?
Beata Javorcik
Eliana La Ferrara
Alexej Makarin
Gernot Müller
