Russia's invasion of Ukraine is one of the most dramatic events of the 21st century. The effects of this war are likely to irreversibly change the political and trade balance between the West and the Kremlin, with significant consequences for individuals and businesses.
The crisis that has emerged represents a geopolitical event of great importance for the international community. The conflict raised concerns about Ukraine's national security, sovereignty, and territorial integrity and created a climate of tension between neighbouring countries and geopolitical blocs. This event had significant effects on the global economy and markets. The political uncertainty and volatility in financial markets that resulted from the Russian invasion created a climate of distrust among investors, negatively affecting the performance of several economic industries.
The outbreak of militarized conflicts has proven to generate considerable effects on financial markets. Academic studies of the subject have shown, however, that these effects are not always adverse. In some cases, the escalation of a war can bring greater certainty and predictability to its outcomes, calming investors. In other cases, however, the results have had a sharper effect, negatively impacting the price of the financial instruments examined.
The relevance of the Russian-Ukrainian conflict is due to the two countries' position in exporting many raw materials, generating heavy consequences, particularly towards the European continent. The continuation of the crisis, alternating with more or less intense phases, has already shown marked adverse effects on the financial landscape.
This thesis decided to investigate the impact of the conflict on the share performance of the European and Russian energy sectors.
This sector is particularly vulnerable to the effects of the war crisis, given Europe's heavy dependence on Russian natural gas supplies. The escalation of the conflict increased uncertainty about the future of energy supplies and led to an increase in the price of gas, which affected the performance of energy companies. The crisis has significantly impacted the region's geopolitical stability, involving oil and gas supply, trade flows, and investment dynamics.
The three hypotheses under consideration define the scope of the research (see Figure 1). With Hypothesis 1, we will assess whether European and Russian energy companies reacted negatively to the escalation during the first ten months of the conflict. Once we have ascertained the significant impact of the conflict in the energy sector, we will proceed through Hypothesis 2 to examine whether the war had a different or more substantial effect on European companies than on Russian ones. The last hypothesis (Hypothesis 3) aims to test the presence of a performance differential between the two main branches of the energy sector, the utility companies and the O&G.
Figure 1: Research hypothesis.
The analysis used a sample comprising the stocks of the largest European and Russian companies operating in the energy sector (divided between utilities and oil and gas companies). The measurement took place over the time interval 2021-2022, bringing to light a complex set of performance vehicles. The construction of the dataset aimed to include within it two categories of drivers: on the one hand, those of inertial performance, i.e., capable of conveying the results of the sector under normal operating conditions̀, and on the other, those of extraordinary performance, on this specific case capable of including the possible effects of the conflict on the pull of companies examined.
The models used (regression and predictive models) pursue a structure aimed at validating the results from different perspectives, highlighting coherent answers to the research question in an organic manner (Figure 2 lists the models included).
Figure 2: Datasets and models adopted.
Regression analysis revealed the relationships between the different variables with market performance and their significance. This analysis revealed a strong negative relationship between war-related variables, such as conflict, arms shipment, gas consumption, dependence on Russian gas imports, and stock performance. The magnitude of these links and their statistical significance affirm a strong impact of the invasion on sector performance.
On the other hand, predictive analysis was used to study performance during the war period (test period). A central part of the investigation was to investigate the residuals of the abnormal return using various regressors, both linear and random forest based.
Figure 3: Performance of predictive models detailing Random Forest results.
The results show high residuals in predicting stock performance without war-related variables. The residuals show a systematic negative trend, highlighting how the model outperforms energy companies' share prices. Next, the models were rerun, but this time including the effects of the conflict by extending the time interval to October 2022. By extending the dataset, the results of the test set showed a smoothing of the negative trend and a discrete reduction in the residuals, improving the forecast. In support of the findings, the predictive models showed a remarkable performance of the war-related variables in predicting stock performance during wartime.
Figure 4: Test of Hypothesis 1 (H.1).
Finally, two in-depth studies based on regression analyses were conducted to investigate further the Russian invasion's effects on the energy sector.
The first vertical analyses the subset of Russian companies, looking for a possible differential in performance (and impact of the conflict) compared to European companies. Although the initial hypothesis assumed a lower adverse effect of the crisis on the subset of Russian companies, the analysis results revealed the exact opposite. The wave of mistrust of the financial world towards the Russian market did not spare the energy sector, generating a more significant negative impact than the European energy market.
The second vertical delves into the subset of utility companies. In this case, the conflict had more negative effects on this sector, mainly driven by the buy-side position held by these companies in the fossil fuel market. It also emerged that investors favoured utilities with solid investments in renewables more and suffered less negative impact from the crisis.
Figure 5: Testing of Hypotheses 2 and 3 (H.2 and H.3).
The highlighted results are a first attempt to probe the effects of the invasion on the sector. Future work should focus on validating the observed trends and further investigating their causal mechanisms.
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