The Invasion of Ukraine and the Energy Crisis: Comparative Advantages in Equity Valuations

We study the impact of the widening energy price differentials caused by the war in Ukraine on the returns of European and US firms. Using several measures of firms' exposure to energy consumption, we show that return differentials between European and US firms widened significantly after the outbreak of the war in Ukraine. Our results indicate a persistent comparative disadvantage between the two regions, driven by heterogeneous energy costs, which has continued even after the partial subsiding of the energy shock by the end of 2022. These findings suggest that, the combination of higher energy costs and more vulnerable energy supplies may have lasting economic implications for Europe, potentially exacerbating its competitiveness disadvantages compared with other geographic regions that have access to more affordable and safer energy inputs.