Recent events in Crimea and eastern Ukraine raise questions about financial risk management as well as urgent political, military, and humanitarian issues. How has the riskiness of the Russian stock market changed? What can investors expect when Russia—or, for that matter, any other country—appears to be on the verge of armed hostilities? The Russian market, as represented by the MICEX index, has posted a total return of -11.3% since the crisis broke out on February 26th. Where will it go from here?
It is impossible to predict the outcome of an historical situation as complex and fraught as the Ukrainian crisis, but examining other modern conflicts might at least help in sizing up the market risk. Our research suggests that, when regionally contained wars break out, the negative impact is sharp but relatively short-lived. However, we also learned that the effect on portfolio returns depends in part on the investment strategy.