It has been two weeks since the world woke up to the terrible news of a Russian attack on Ukraine. Notwithstanding the incalculable costs in terms of human lives, as well as human capital and physical infrastructure, we have witnessed much turbulence in the financial markets. So what has happened so far?

Since markets tend to react to geopolitical risks, US Federal Reserve economists Dario Caldara and Matteo Iacoviello recently constructed a Geopolitical Risk Index (GPR) to be able to compare events at different points in time. It is based on real-time news reports of war threats, terrorist threats, military build-ups, nuclear threats, acts of terror, war outbreaks and escalations.

You can see their daily data plot below, which dates back nearly 40 years. The most notable spikes relate to the 1991 Gulf War, 9/11, the start of the Iraq War in March 2003, the London bombings in July 2005, and now the invasion of Ukraine. For those looking for some kind of consolation right now, the index estimates that we are still nowhere near the level of geopolitical risk we saw in the aftermath of 9/11.

Geopolitical Risk Index


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

The daily GPR is in orange, while there are two other versions that track threat risk (red) and geopolitical acts (green). Essentially, they all moved in the same direction, with the red risk line leading the way. As you can see, these lines and the VIX rose in November after satellite images first showed Russian troop buildups on the border with Ukraine. Other peaks correspond to January 26, the date of NATO’s written response to the Russians, and the start of the invasion on February 24.

Geopolitical risk vs stock market volatility

Measurement of Geopolitical Risk Index vs. VIX Volatility Index

GPRD (orange) = daily GPR; GPRD_Act (green) = geopolitical acts; GPRD_Threat (red) = geopolitical threats. Authors provided

The rise in raw materials

Energy markets, and oil in particular, react to geopolitical risks at the best of times. And given Russia’s enormous importance as an oil exporter, energy prices have been particularly hard hit by this war. Brent is currently trading at around US$116 (£88) a barrel, having risen above US$130 a few days ago. This will impact everything from business cash flow to consumer oil prices, creating inflationary pressure that helps cause recessions.

Because 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 they are destined to continue to increase due to Western sanctions.

Comparison of commodity and asset prices since the invasion

Comparisons of wheat, crude oil, palladium, gold and bitcoin since the invasion

Brent crude = blue; wheat futures = cyan; palladium = indigo; gold = orange; bitcoin = yellow; US dollar (DXY) = purple; 10-year US Treasuries = green. Commercial view

On the other hand, safe havens in times of volatility are doing well. The price of gold is on the rise again after its remarkable rise in the first months of the pandemic. Bitcoin and other cryptocurrencies have the potential to benefit as they are a possible way for Russians to circumvent sanctions, but they have been more subdued lately.

Stock markets

The stock market response to war is more complex, as different markets have more or less exposure to different commodities than others. They also have varying levels of exposure to the Russian stock market (which remains closed after plunging with the ruble following the invasion).

According to our calculations based on data dating back to 1985, European countries are more correlated to the Russian market and therefore more vulnerable. For example, France, Germany and the United Kingdom have a correlation of 0.45, 0.42 and 0.47 with Russia, where 1 would mean that they evolved in parallel and 0 that they did not are not influenced 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 broadly matches the performance of the various stork markets since the invasion, as you can see below.

Comparative stock exchanges

graph comparing stock market performance since the war

FTSE 100 (UK) = blue; S&P 500 (United States) = orange; Toronto Stock Exchange (Canada) = cyan; CAC 40 (France) = yellow; DE40 (Germany) = indigo; Shanghai Stock Exchange = green; MOEX (Russia) = purple. Commercial view

Finally, what about the different types of businesses? As you can see below in this breakdown of US players, different sectors performed quite differently at the start of this crisis. The black line is the S&P 500, so those below have underperformed and those above have done better.

Energy companies are doing very well, for example (as are arms manufacturers). Companies that sell basic consumer goods or more discretionary consumer products, ranging from hi-fi equipment to movie tickets, have lost out on fears of having less to spend due to commodity inflation raw.

Comparison of the different sectors of the S&P 500

Communications = blue; consumer discretionary = cyan; basic consumption = yellow; energy = indigo; financial = purple; health care = green; industrial = dark red; IT = orange; materials = red; real estate = pink; utilities = lilac; S&P 500 = black. Commercial view

However, we should not be fooled into thinking that certain sectors will simply benefit from the war. There may be short-term winners, but the interconnectedness of economies, the burden of sanctions and the costs of increased uncertainty will eventually affect all markets. This will affect household budgets, salaries but also pensions – whatever the final outcome, which remains largely unpredictable.The conversation