March 24, 2023

How Much Was the Expanded Russian Invasion of Ukraine Anticipated?

Response: Very little. This point is vital in assessing how suitable conditional projections of inflation were, specifically those relating to 2022.

Textual analysis and market indicators. To begin with, the Geopolitical Risk Indicator and Economic Policy Index:

Figure 2: VIX close (teal). Source: CBOE through FRED.
We understand that any Russian aggression wouldve had a positive influence on energy costs, both oil and natural gas. Did spot markets (remember, as a storable commodity, oil and gas should reflect both anticipated and existing future conditions) reflect anticipated Russian action?
Herere Brent and Dutch TTF (gas):.

Figure 4: Natural gas EU (Dutch TTF), Eur/MWh (blue), October 2021-October 2022 [Keep in mind various time scale] Source:, accessed 18 Oct 2022.
While there are spikes in both costs, note that till the beginning of the Special Military Operation, rates had stabilized in the EU market for natural gas.
Oil rates since November were rising, but futures costs showed backwardation.
Assuming a growth of the Russian war on Ukraine was going to spur sanctions, increasing threats of sovereign default, we would have anticipated a rise in CDSs worth ahead of time. The value did not increase up until the initiation of the Special Military Operation.


What about market indicators. The VIX increased at the beginning of December when stock prices dropped, and surged (as US intelligence warnings circulated). Through the Fall of 2021, the US financial markets did not view a high threat of Russian hostility affecting equity markets.

Figure 5: Russian sovereign debt CDS value. Source: World of Government Bonds, accessed 18 October 2022.
The current value iimplies 100% possibility of default utilizing 40% healing rate.
Without knowing what the rates wouldve remained in the counterfactual of no Russian Special Military Operation, one cant presume the possibilities the markets were assigning to the result that was really understood. A high likelihood does not appear to be associated by markets (likewise by textual analysis).
If one believes inflation outcomes are substantially determined by the trajectory of energy costs, then the forecasts of inflation have actually to be judged on whether representatives believed a broadened Russian invasion was most likely. Had forecasters, consisting of those in policymaking arenas, associated a higher possibility of boosted Russian aggression, then inflation forecasts would have likely have been greater (and development projections correspondingly lower).
Simply put, keep the distinction between unconditional and conditional forecasts in mind, when assessing the inflation forecasting record

Figure 3: Price of oil (Brent), $/ bbl (black). Source: EIA through FRED.

NOTE different time scale] Source:, accessed 18 Oct 2022.

Figure 1: United States Economic Policy Uncertainty (EPU) index (blue), and Geopolitical Risk (GPR) index (tan). Source: Baker, Bloom and Davis through FRED, and GPR index, accessed 18 Oct 2022.
Notice that the United States EPU– concentrated on the US of course, does not indicate much movement prior to the Biden alerting to European leaders, nor prior to the Russian “unique military operation”. The GPR index did rise as news of US intelligence warnings to Western intelligence companies circulated, and spiked simply days prior to the real invasion.
What about market indications. The VIX surged at the beginning of December when stock costs dropped, and surged (as United States intelligence cautions distributed). But through the Fall of 2021, the US monetary markets did not view a high risk of Russian hostility impacting equity markets.

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