Russia–Ukraine crisis: The effects on the European stock market

• Published date: 01 September 2023
• Author: Shaker Ahmed,Mostafa M. Hasan,Md Rajib Kamal
• Date: 01 September 2023
• DOI: http://doi.org/10.1111/eufm.12386

DOI: 10.1111/eufm.12386

ORIGINAL ARTICLE

Russia–Ukraine crisis: The effects on the

European stock market

Shaker Ahmed

1

|Mostafa M. Hasan

2

|Md Rajib Kamal

3,4

1

School of Accounting and Finance,

University of Vaasa, Vaasa, Finland

2

Department of Accounting and

Corporate Governance, Macquarie

Business School, Macquarie University,

Sydney, New South Wales, Australia

3

NTNU Business School, Norwegian

University of Science and Technology,

Trondheim, Norway

4

Department of Management and

Finance, Faculty of Agribusiness

Management, Sher‐e‐Bangla Agricultural

University, Dhaka, Bangladesh

Correspondence

Mostafa M. Hasan, Department of

Accounting and Corporate Governance,

Macquarie Business School, Macquarie

University, Sydney, NSW 2109, Australia.

Email: mostafa.hasan@mq.edu.au

Abstract

We examine the effect of the Russia–Ukraine crisis on

the European stock markets. Because of increased

political uncertainty, geographic proximity and the

ramifications of the fresh sanctions imposed on Russia,

the European stock markets tended to react negatively

to this crisis. We find that on 21 February 2022, when

Russia recognized two Ukrainian states as autonomous

regions, European stocks incurred a significant nega-

tive abnormal return. Moreover, the negative stock

price reactions continued in the post‐event period. The

magnitude of the stock price reactions to this crisis

exhibits considerable variation across industries, coun-

tries and size of the company.

KEYWORDS

event study, political uncertainty, Russia–Ukraine crisis, stock

returns

JEL CLASSIFICATION

G01, G21, G30, G32

Eur Financ Manag. 2023;29:1078–1118.1078

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wileyonlinelibrary.com/journal/eufm

EUROPEAN

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This is an open access article under the terms of the Creative Commons Attribution‐NonCommercial License, which permits use,

distribution and reproduction in any medium, provided the original work is properly cited and is not used for commercial purposes.

© 2022 The Authors. European Financial Management published by John Wiley & Sons Ltd.

We would like to gratefully thank John Doukas (the Editor) and two anonymous referees for their helpful comments

and insightful suggestions on the earlier version of this paper. Shaker Ahmed gratefully acknowledges the research

grant by the OP Group Research Foundation.

1|INTRODUCTION

The recent Russia–Ukraine crisis was exacerbated on 21 February 2022 when Russia recognized

Ukraine's Donetsk and Luhansk regions as independent states and mobilized Russian troops inside

those two parts of Ukraine as peacekeepers. World leaders called the action the start of a war.

Consequently, the United States, the United Kingdom and countries in the European Union (EU)

started to impose economic sanctions against Russia. With 37.3% of Russia's total global goods trade

in 2020, the EU was Russia's most important trading partner (EC, 2022). Russia supplied 27% of the

crude oil, 46.7% of the solid fuel, and 41.1% of the natural gas imported by the EU (Eurostat, 2022).

Because of the integrated nature of the Russian economy, particularly with the European countries,

through the trade of oil, gas, food and raw materials, the increased geopolitical tension and

subsequently imposed sanctions were likely to have an adverse effect on western economies as well

as on the Russian economy. This motivates us to investigate how investors in the European stock

markets responded to this event.

Prior literature investigating the link between political uncertainty and financial market

performance finds that fear of political instability has a significantly negative effect on both the

stock market return and the risk profiles of financial assets (see e.g., Dimic et al., 2015;Gemmill,

1992; Jones & Banning, 2008; Kapar & Buigut, 2020;Li&Born,2006;Mei&Guo,2004;Nippani&

Medlin, 2002). Using a number of international political crises, Berkman et al. (2011) demonstrate

the importance of political crises in explaining both the mean and the volatility of stock market

returns around the world. Using data from 49 emerging nations, Lehkonen and Heimonen (2015)

also report an inverse relationship between political risk and stock returns. Dimic et al. (2016)

demonstrate that political risk influences currency carry trade returns.

Among the studies of recent major political risk events, Smales (2017) documents a significantly

positive relationship between political risk (the Brexit referendum) and financial market uncertainty.

He et al. (2017)examinetheeconomiccostofnon‐violent diplomatic disputes between mainland

China and Taiwan, and show that political tension is related to a significant decline in the stock

market return. They also find that anticipated future tension levels are related to reductions in

current stock returns. Kapar and Buigut (2020) find that diplomatic and economic blockades on

Qatar resulted in a substantial impact on stock market volatility in Qatar. Furthermore, Buigut and

Kapar (2020) demonstrate that the blockade of Qatar had a considerable impact on stock markets in

Gulf Cooperation Council countries, with the effects varying across different industries and countries.

Finally, Bash and Alsaifi (2019) show that the disappearance of Jamal Khashoggi has had a severely

negative influence on the Saudi Stock Exchange's stock returns.

There are also studies that explore the economic consequences of geopolitical risk (GPR),

which captures the uncertainty arising from the possibility of wars, terrorist acts and conflicts

between nations (Caldara & Iacoviello, 2022). Studies suggest that GPR has significant impacts

on corporations and financial markets, as evidenced by the adverse effects on investment,

employment and downside risks (Caldara & Iacoviello, 2022), equity returns and bond spreads

(Rigobon & Sack, 2005) and volatility in the stock markets (Choi, 2022). In a recent study,

Salisu et al. (2022) show that geopolitical threats (e.g., military build‐ups, threats of war and

terrorism) have a greater adverse effect on stock returns than geopolitical acts (i.e., the actual

occurrence of adverse events). Russia's invasion of Ukraine in 2022 is viewed as part of a

resurgent geopolitical competition among the world's great powers,

1

significantly increasing

1

https://www.cfr.org/backgrounder/ukraine-conflict-crossroads-europe-and-russia

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the geopolitical threats. Our study contributes to the literature by examining how European

stock markets have reacted to the Russia–Ukraine crisis.

The ongoing Russia–Ukraine conflict is unique in nature, and differs remarkably from past

political uncertainty and wars such as the Russian annexation of Crimea in 2014, the Persian Gulf

War, and the Iraq War in several important ways. First, although the Russian invasion of Ukraine is

centred in Europe, it has triggered geopolitical risks and shaken the global economy. For example,

the geopolitical risk index developed by Caldara and Iacoviello (2022) demonstrates that the

geopolitical threat reached a peak level after the Russian invasion of Ukraine (see Figure 1).

Moreover, the invasion is likely to impair financial intermediation and trade, raising concerns

about slower economic growth and faster inflation around the world. As a result, the impact of this

crisis is considerably broader and deeper than the impact of previous political events.

The second notable feature is that this crisis has resulted in a slew of sanctions and

restrictions against Russia being imposed by a number of nations. On our selected event date of

21 February,

2

the EU Council enacted restrictive measures against five individuals.

3

On 22

February, the US announced its first tranche of sanctions to limit Russian access to financial

resources.

4

On 23 February, the European Council introduced a first‐of‐its‐kind sanctions

package.

5

On 24 February, European leaders agreed to impose additional sanctions against

Russia in the financial, energy and transportation sectors, restrictions on dual‐use goods, export

controls, export financing and visa policies. Indeed, the number of sanctions against Russia

following the invasion of Ukraine is higher than the number imposed after the Russian

annexation of Crimea in 2014. Moreover, the sanctions levied against Russia in 2014 were

primarily aimed at its dealings with Crimea and had no direct effect on Russia. Overall, because

of the unprecedented recent sanctions, Russia has become the single largest target of global

sanctions (see Figure 2). Finally, unlike the previous wars, the Russia–Ukraine crisis has

disrupted the global supply chain. Given that Russia (Ukraine) is a major supplier of oil, gas,

metals and fertilizers (wheat, sunflower oil and corn), this crisis has resulted in a reduction in

the supplies of these commodities. Further, the embargo on Russian exports and Russia's

refusal to allow foreign cargoes to transit via its waterways and airspace have disrupted the

global supply chain, causing a sharp rise in commodity prices.

We predicted that the Russia–Ukraine crisis had a negative effect on European stock markets

through economic and political channels. The economic effect of the Russia–Ukraine crisis is

evident because Russia is an integrated trading partner of European countries and a key producer

and supplier of crude oil and natural gas, with pipelines feeding many parts of Europe. Moreover,

European countries are highly dependent on Russia and Ukraine for food (e.g., wheat, corn, barley,

maize, sunflower seed and sunflower oil), fertilizers and raw materials.

6

The disruption arising

from the Russia–Ukraine crisis and the accompanying sanctions on Russia have already raised

pricelevels,andthisislikelytohavearippleeffect on the European economy and corporate

2

Although the political tension between Russia and Ukraine was discussed for months and several countries expressed

concern about a possible Russian invasion of Ukraine, those worries became a reality following Russia's announcement

on 21 February 2022. This announcement was dubbed the start of a new war by world leaders, and western countries

started to implement a slew of financial sanctions shortly after Russia's proclamation. Hence, 21 February is the most

significant date in the timeline of the Russia–Ukraine crisis, and is chosen as the event date in our paper.

3

https://www.consilium.europa.eu/en/policies/sanctions/restrictive-measures-ukraine-crisis/history-ukraine-crisis/

4

https://www.whitehouse.gov/briefing-room/statements-releases/2022/02/22/fact-sheet-united-states-imposes-first-

tranche-of-swift-and-severe-costs-on-russia/

5

https://www.consilium.europa.eu/en/policies/sanctions/restrictive-measures-ukraine-crisis/

6

https://www.ifpri.org/blog/how-will-russias-invasion-ukraine-affect-global-food-security

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