As Russia’s war against Ukraine unfolds, its global economic impact remains uncertain. Evidence from the stock market suggests that companies with strong trade or ownership ties to Russia are more likely to face negative consequences as the conflict unfolds.
Wars cause severe economic damage in the long run. Although it is still too early to assess the long-term effects of the Russian invasion of Ukraine from early 2022, it is clear that both Ukraine and most other European countries are already acutely affected.
One way to assess the impact of the conflict is to look at the financial markets. Asset prices can tell us something about the real economy. In general, analyzing the immediate reaction of stock prices can provide valuable insights into the possible long-term consequences of major events such as wars.
Stock prices typically reflect the expectations of many well-informed individuals and businesses (such as banks and pension funds) about future economic prospects. Wars usually trigger a change in those expectations — and it’s not always a price drop. For example, the stock market reacted positively to the invasion of Iraq in March 2003 as global investors took it as ‘good’ news.
War can have different effects on asset prices in general. But what about at the level of individual companies? A key question is which types of companies can expect valuations to rise, and which others should expect a sustained decline.
In the case of the invasion of Ukraine, the close connection with Russia makes a difference. Recent research from the Center for Economic Performance (CEP) shows that companies with close trade or ownership ties to Russia experienced a significant drop in their total returns after the invasion. While these impacts may not last long, they are important on a broader scale.
Aggregate losses from dependence on Russia through trade or ownership are 0.8 percentage points and 0.73 percentage points for the average country. This means that an aggregate stock market index based on companies in the CEP study’s sample is down 1.53% in score for the average country due to international ties to Russia. European countries are among the hardest hit, indicating the potential for significant long-term impacts on those countries.
Why are some companies dependent on Russia?
Today’s interconnected global economy means that businesses are connected in a variety of ways, including through international trade and ownership. Global input-output tables, which show links between industries around the world, can be used to assess how specific industries – and therefore companies – are dependent on Russian trade flows. More specifically, the total dependence of a given industry on Russia can be measured by the weight of exports to Russia and imports from Russia within the total output of that industry.
For the countries in the sample of the CEP study, the companies show an average dependency on Russia of 0.25%. This means that on average a company with a production of 1 billion US dollars exports and imports goods worth 2.5 million US dollars from Russia.
However, this number hides significant differences. While the dependence of the companies in the sample is below 0.06% for half of the companies, the dependence for the companies most dependent on Russia is 0.54%. The most dependent firms trade almost 10 times more with Russia relative to their output than the bottom half.
There are also significant geographic differences. With an average dependency of 0.80%, dependency on Russia is highest in Europe. In Europe, companies producing refined petroleum products such as gasoline are the most dependent, with an average dependency of 14.64%. So for every $100 of production made, they trade with Russia $14.64.
How have stock prices changed after the invasion?
The development of share prices is instructive. A look at cumulative asset returns in a short window surrounding the Russian invasion of Ukraine gives us an indication of how stock prices reacted to the outbreak of conflict.
Figure 1 shows the average cumulative returns of companies due to their trade and multinational ties with Russia. The left panel shows that the companies most dependent on Russia had returns significantly lower than other companies at the time of the war. The right panel shows that companies that have a direct ownership relationship with Russia had lower total returns than companies that were not directly affiliated with Russia at the start of the conflict.
Figure 1: Average cumulative corporate returns broken down by Russia exposure
Source: Authors’ calculations
What are the differences between the companies? A more thorough analysis, comparing companies within the same country and industry and taking into account other company characteristics such as size, confirms these results. Companies with international connections to Russia saw their cumulative returns fall significantly.
Because cumulative returns are expressed as percentages, changes in cumulative returns are expressed in percentage points. Those in the top 10% of total dependency on Russia saw their returns fall by 2.16 percentage points relative to other companies. So a company that is highly dependent on Russia and was valued at £100 before the invasion would see a loss of £2.16 in value compared to a company of the same value but without strong trading ties with Russia .
The Russian branch resulted in a 3.12 percentage point decrease in cumulative revenues. In this case, a company with a subsidiary in Russia that was valued at £100 before the invasion would see a loss of £3.12 in value compared to a company with no subsidiary in Russia. Having an office in Ukraine had no impact on total returns.
The CEP study also examines whether the impacts differ between exports to Russia and imports of precursors from Russia. The results show that the effect on cumulative earnings is almost exclusively caused by companies that are heavily dependent on Russian imports of inputs (such as fossil fuels or other commodities such as metals).
This suggests that investors expected a greater impact on corporate performance due to the difficulty of substituting input materials from Russia (e.g. gas) rather than limited access to the Russian export market.
How big are these stock market losses?
According to our research, the average loss across countries was 0.8 percentage points due to high trade exposure with Russia, with an average loss of 0.47 percentage points. For companies with a branch in Russia, the average loss was 0.73 percentage points and the median loss was 0.52 percentage points. The losses that occur through both channels are significant.
Geography plays an important role in determining the magnitude of overall losses. The losses are concentrated in Europe: Eastern European countries are among the most affected countries due to trade links; and Western European countries are most affected by cross-ownership. In contrast, countries like the United States and China saw a relatively modest overall effect because they are less closely linked to Russia through trade or ownership.
At the time of writing, the conflict in Ukraine shows little sign of easing. This means that it is difficult to estimate the overall impact that the invasion will have on the global economy in the longer term. But a look at stock price volatility at the start of the conflict highlights significant 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 points to potentially important long-term economic implications for these countries.
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Beata Javorcik
Eliana LaFerrara
Alexey Makarin
Gernot Mueller
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