Russia’s Invasion of Ukraine and Its Impact on Stock Prices

Russia's invasion of Ukraine in February has dominated not only geopolitical news but also economic news in 2022. Both countries are important exporters of many commodities. Russia is a particularly important producer of energy commodities, such as oil, gas and coal; precious metals, such as gold, platinum and palladium; and foodstuffs, such as wheat.Although it is not shown in the following table of key exports, Russia is also an important exporter of palladium, a metal used in catalytic converters, electronics and jewelry.Ukraine also exports large quantities of foodstuffs, such as wheat and sunflower oil, and iron products.

The following table shows two lists of exports, one from Russia and one from Ukraine, as well as the percentage of global exports and gross domestic product (GDP) for each category.

The figure below shows that the prices of oil, wheat and palladium rose sharply in late February and early March. In the figure, two key dates are noted with vertical lines:

• Feb. 21, 2022. Russian military forces enter parts of Ukraine already controlled by Russian-backed separatists.
• Feb. 24, 2022. Russian military forces begin an all-out invasion of Ukraine.

The price increases became particularly pronounced in early March as market participants came to believe that the war would be prolonged and most countries in the Organization for Economic Cooperation and Development would impose serious sanctions on Russia.

Equity prices in the U.S. and the rest of the world also responded to the changes prompted by the invasion, primarily the changes in commodity prices. Taken as a whole, global equities tended to decline sharply from mid-February to mid-March and then mostly recover later in March.

The commodity price changes benefited some stock prices while reducing others. To determine which stocks benefited and which ones lost, we estimated the average reaction of the top 500 stocks in the Center for Research in Security Prices database to percentage changes in a weighted commodity price index.Percentage changes in the commodity price index were constructed from percentage changes (returns) in the prices of oil, gold, wheat and palladium. The return to each commodity was weighted by the inverse of the return's standard deviation.That is, we estimated how much a 1% change in a commodity price index would change the equity prices of each of 500 stocks. (See the following table.)

The upper half of the second table shows stocks that moved with commodity prices, while the lower half shows stocks whose prices moved against commodity prices. Stocks in each half were ranked by the sensitivity of the stock price to the commodity price index (commodity beta). The third column shows the commodity betas. A positive commodity beta indicates that the stock price rises with higher commodity prices, while a negative commodity beta indicates that the stock price falls with higher commodity prices. The final column shows the annualized continuously compounded return.A stock's decline may exceed 100% because the annualized returns are 250 times the mean continuously compounded return, in which 250 is the approximate number of business days in a year. Some stocks with a negative beta may show a gain despite higher commodity prices because of other news and events that affected their share price during the quarter.

It should not be surprising that firms that sell oil, gas, or gold, or provide services to those industries, benefited from the big increases in the price of oil. It is more difficult to figure out why some firms' stock prices fell particularly hard, although some are interpretable. Deutsche Bank was among the stocks whose prices lost the most value to commodity price hikes. This bank has (or had) extensive investments in Russia, and the combination of the war and sanctions may have greatly reduced the value of those investments. Delta Air Lines was also among the firms that seemed to have been hard hit by the increases in commodity prices. This makes sense because higher oil prices mean higher jet fuel prices, and Delta also had a partnership with Aeroflot, the Russian national airline.

Notes

¹ Although it is not shown in the following table of key exports, Russia is also an important exporter of palladium, a metal used in catalytic converters, electronics and jewelry.

² Percentage changes in the commodity price index were constructed from percentage changes (returns) in the prices of oil, gold, wheat and palladium. The return to each commodity was weighted by the inverse of the return's standard deviation.

³ A stock's decline may exceed 100% because the annualized returns are 250 times the mean continuously compounded return, in which 250 is the approximate number of business days in a year. Some stocks with a negative beta may show a gain despite higher commodity prices because of other news and events that affected their share price during the quarter.