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The Zelensky Moment: Arms, Investments and the Russian Invasion

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After Volodymyr Zelensky’s election, Martijn Boermans uncovers a significant rise in arms stock holdings among investors from countries previously under the direct influence of the Soviet Union, in comparison to their counterparts in other European nations.

Image courtesy of interviewee. December 14, 2023

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The speaker expresses personal views regarding the geopolitical and economic implications of the Russian invasion of Ukraine, particularly focusing on the phenomenon referred to as the "Zelensky moment." This video video moment marks a significant shift in both the perception and investment behavior of countries near Ukraine in relation to defense spending and weapons stocks.

1. **Geopolitical Context**: The speaker notes how the Russian invasion has impacted Europe, with countries closer to Ukraine experiencing heightened awareness and investment in defense. This video video created an opportunity to test various economic theories related to geographical economics, financial economics, and behavioral economics.

2. **Investment Behavior**: Before the invasion, investment trends in European countries were similar, but following the election of Ukrainian President Zelensky, countries adjacent to Ukraine significantly increased their investments in military stocks. This video video effect was not seen to the same extent in countries further from the conflict.

3. **Research Methodology**: The research aims to explore the relationship between the election of Zelensky and investment behaviors in weapon stocks using various datasets, including stock market data and surveys capturing investor sentiment. The speaker highlights the importance of geographical proximity, political awareness, and investor attention in influencing these investment decisions.

4. **Investment Gains**: The analysis reveals that countries close to Ukraine increased their weapons-related investments by over 30% in comparison to other EU countries following the Zelensky moment. Historical contexts and survey data indicate that investors in former Soviet states were particularly mindful of the potential threats and, as a result, adjusted their portfolios accordingly.

5. **Interpretation of Findings**: The speaker concludes with two interpretations of the observed investment behavior: either investors acted rationally, seeking financial gains based on better information about the potential for conflict, or they were driven by fear of an invasion, prompting them to hedge against perceived risks by investing in defense stocks.

Overall, the discussion underscores the significant economic and psychological consequences of geopolitical events, particularly regarding how investors respond to crises based on their geographical and political contexts.

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X-TIMESTAMP-MAP:LOCAL=00:00:00.000,MPEGTS=900000

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These, views that I will express

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are my personal views.

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And the usual disclaimer applies

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that these are not the views, expressed,

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here from the Touch Central Bank's side.

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Um, so I, I think we have all witnessed,

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with the Russian invasion, how the whole of Europe got,

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close to, to the war situation.

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And as a researcher, this is sort

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of a very interesting moment to test a few theories

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that we have in geographical economics,

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in financial economics literature,

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and even in the behavioral economic literature.

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So what, what sparks us as researchers here

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with the Zelensky moment is that countries that were close

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to, to the Ukraine had a very different experience from the

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conflict compared to other countries in the European Union

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before the Russian invasion.

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And this is something that we try to, test further in,

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in our research

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before, the Russian invasion in, in the whole

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of Europe, there has been a, a buildup of in, in terms

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of defense spending, increased,

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production and so on.

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Uh, but this was most notable in countries

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that were closer to the Ukraine.

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Um, second of all, what what we observe is that

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if you look at the investment in stocks, which is something

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that we will utilize specifically

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to looking at the weapon investments, is that

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before, a certain time the trends between

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all countries in the European Union,

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they were very, very similar.

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So what we try, to see is that this very salient moment

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when, Mr.

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Zelinsky was elected as president when he wanted

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to change the constitution of the Ukraine to become member

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of, nato.

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And when he visited Brussels,

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yen Stoltenberg at the NATO headquarters,

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where he spoke about joining NATO specifically.

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And all these moments happened in 19, in the second quarter

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of 2019.

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And this is a, a moment

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that has been very strong in the recollections of people

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and investors who are close to the Ukraine.

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Whereas if, whereas if you look at survey data

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or Google Trends data,

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other investors in the European Union,

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they didn't perceive this moment

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as a big major geopolitical shift that was occurring.

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So economists then have like a toolkit. We have two groups.

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One is being treated by a massive moment,

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namely the zelinsky moment when a new president came into

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power, whereas other countries in the European Union,

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they were not really noticing about the significance

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of this situation.

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So we try to, to see if,

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the geopolitical factors and awareness

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Can actually explain weapon allocations in weapon

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stocks specifically.

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Um, and that's, that's what we try to do in our research.

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There are, there are several areas of interest here.

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So if you look at a, economic

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geography point of view, it is well known

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that investments follow a spatial dimension.

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So investors tend to invest more close to home.

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Um, there is this in finance, this home bias that we, we,

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we put too much in our home market

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compared to the world market.

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So what we, what we think here is having an event like this,

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election of zelensky is a nice way to expose

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if this affected the investment allocations across this

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geographical proximity dimension to the Ukraine.

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So a second thing where I think that our study contributes

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is the, the finance literature.

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So in the finance financial economics, well,

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we talk about here weapon investments.

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So a very specific asset class for

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what we're trying to study.

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And in this very specific asset class, it's

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sometimes considered like a sin stock.

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And sin stocks are a financial asset category,

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which includes things like tobacco, gambling, pornography,

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which some investors out

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of principle exclude from their portfolios.

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And this sin stock bucket often also

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includes weapon investments.

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So knowing that certain investors would shade away

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or shun these investment, categories you would expect

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as an investor to actually gain, outperformance

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or as we call an access returns on these

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investments, positions.

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And this is also what we exposed, have seen that once Russia

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invaded the Ukraine, once the war in Ukraine started

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stock prices of firms like Ray Technologies,

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Northern Groman, in, in here in Europe, in Germany,

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Rhine Maal in, in Italy, you have Leonardo,

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those stock prices skyrocketed.

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And there are also, scientific studies, event studies

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that show that these stocks had massive outperformance.

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So that's from the financial, economic, literature side.

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But if you look from a, sustainable investment,

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position, again,

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I already mentioned sometimes investments in weapons

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are seen as controversial.

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Uh, a sustainable investor, would exclude these stocks.

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So with a major geopolitical shift at your border,

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are you going to maybe change your fundamental reasons

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for shunning certain investment categories?

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And this is then maybe the last thing when I think about the

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Literature, is this behavioral aspect.

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If you are, let's say an investor in a former so yet country

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and you perceive the potential threat of an invasion,

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you, you, you might want

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to adjust your portfolio for two reasons.

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The first one I mentioned,

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maybe you think you can get financial returns out

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of it once the conflict escalates.

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Secondly, more behavioral aspect is, well,

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in the past when wars broke out, people, they started

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to take nice diamond rings as an insurance policy.

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We call this hedging.

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So you could do the same now in the modern financial markets

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with stock investments, a global weapon industry market

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where you would put your money not in diamond rings

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as a hedge, but you would actually hedge

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by putting your money in weapon arm producers.

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And there's also a study, that that shows

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that when you look at the behavioral aspects of investors

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and, and especially households that, the households

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that are closer to the Ukraine, they were much more aware

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of all the troubles that could lay ahead

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of them as soon as Mr.

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Zelinsky got elected as president,

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which we adopt the zelinsky moment.

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And researchers from, for example, the Budes Bank, Renco

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and others, they, they show that the in survey data

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that the geopolitical risk that were perceived,

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they were much, much higher in former so states,

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and there was much greater attention than

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in other European Union countries.

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And this is also something that we, try to do

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with Google trends data.

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So we have massive data searches on, on,

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on Google from households, from investors.

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And what we see is that when Mr.

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Linsky got elected in these, former Soviet countries,

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or maybe even if you look at the Iron Curtain countries,

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there were massive, massive searches for zelensky.

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Whereas in the other European Union countries,

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there was not any significant change in search

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behavior on Zelensky.

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And this of course, all changed on,

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on the February 24th in 2022 when Russia inve invaded.

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Then search behavior

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for Zelensky across the European Union

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became very, very similar.

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So we have this difference in timing

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that we can later utilize, to test our theories.

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Uh, so we, we, we start off with, with getting a list

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of weapon manufacturing data from, an, institute in,

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in Oslo, it's called cpri.

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And they have a, a database on on arms

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where they track firms and their, their arm sales

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and military spendings.

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And we try to link that to stock market data.

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And, and this is what we put in the paper.

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It's available for anyone for future research as well.

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And that we can link to this unique data set that, that,

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the Euro system has under the realm

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of the European Central Bank.

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It's called the securities holding statistics,

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where we observe stock by stock investments from,

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for example, Dutch households

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or French insurance corporations or German banks.

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So it's across the economy, we can track these positions

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and it also includes countries that are, not part

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of the Euro system, but are part of the European Union

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countries like Geria, Romania, Poland,

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they're all also included in this dataset.

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So what we, we can do, once we track these two,

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we can actually map

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how weapons stock investments evolved over the period.

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And already to give a brief, sneak preview before Mr.

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Zelinsky election, the investment in weapons stocks,

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they were very, very similar across

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current across countries.

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So there was not any financial gain

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or news attention that made a shift

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between these two investors.

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So the nice thing

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with these securities holding statistics is

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that we can really, really track the portfolios across these

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different countries, different type

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of investments over time.

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And this data, set has also been greatly used in,

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in prior research.

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So for example, I myself did a literature

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and I'm, I'm counting almost a hundred scientific studies

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already with this dataset.

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Um, but this has been mostly done in, in, banking

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and finance and monetary economics field where I come from,

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but not in, in the political,

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of, of, of this study.

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So we do a, a standard regression where we, want

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to explain the, the holdings by sort of what, what is sort

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of the treated group, which are the countries close to,

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to the Ukraine in, after the election of Mr.

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Zelinsky. And this is a, a difference in difference model

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where we can compare the reactions in terms of the,

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the arms investments between these two group of countries

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and everything that is different that would be attributed

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to the event of Mr.

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Zelinsky election. So the major result for us is

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that we look at three lines to explain the differences

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across these investors, that that is the,

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geographical proximity, political factors,

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and the attention effects.

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And all, all of these three factors seem to indicate

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that countries that are closer to the Ukraine

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before the Russian invasion, but after the election of Mr.

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Zelinsky, the Zelinsky moment

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Massively increased their investments in weapons stocks.

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So this is a very, very particular niche group

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of investments,

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and I think it that is almost like a quasi experimental

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setting to really show that these investors chose

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to put their money, their portfolio holdings in the,

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in this group of assets.

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So to give you an example, countries

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that were in close proximity to the Ukraine,

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they increased their holdings in, in this short time window

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of more or less one, one year with 30, 32% more

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than other European investors did over that period.

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And if you look at the countries that were part of the,

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the Iron Curtain, they increased their holdings almost

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with more than a hundred percent more than those

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that are in the European Union,

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but not under former Soviets,

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influence, so to speak.

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And if I would show, one single picture, you would see,

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a divide across the distance to Kief where you very,

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very clearly see that investors close to, to kief,

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they massively increase their weapon stock investments,

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whereas actually those further away, they actually have

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decreased their holdings of weapon stocks.

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A lot of researchers looking at the, at,

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at the war in Ukraine, they will focus on

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the period from the invasion.

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But there's actually a lot things happening

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before the invasion, especially when there was a change in,

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in, in regime in Ukraine, which was very noticeable.

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When you also speak to people

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who are from former Soviet states,

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it was a very massive shift.

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You see that in survey data.

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There's also, other Euro barometer data

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that indicates this was already a major shift happening

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before, and we can track that

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same shift within the weapons stock investment.

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So the closer you are since the Zelinski moment, it has had,

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there was the major shift already occurring.

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And, the, the, the key question

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that we actually cannot answer,

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but this is sort of the interpretation of our study, is

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that either these investors were in a way very, very smart

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because they had better information about the potential of,

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of, of buildup, to the conflict.

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And the election of Zelinsky was sort

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of a wake up call moment to actually

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put your money in these weapons stocks,

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which will actually give you massive outperformance.

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So that will be more of the, the rational,

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financial gain, type of interpretation.

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The other interpretation is

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that these investors were actually really, really scared

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of a potential Russian invasion.

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And if you are really, really scared, you need

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to hatch yourself,

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and that this could be a very good hatch,

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or flight to safety, so to speak.

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Uh, that we, we also know from the financial literature,

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that has actually occurring here in the,

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in the geopolitical, SMOs.

00:00 - These, views that I will express are my personal views. And the usual disclaimer applies that these are not the views, expressed, here from the Touch Central Bank's side. so I, I think we have all witnessed,

00:13 - with the Russian invasion, how the whole of Europe got, close to, to the war situation. And as a researcher, this is sort of a very interesting moment to test a few theories that we have in geographical economics, in financial economics literature, and even in the behavioral economic literature. So what, what sparks us as researchers here with the Zelensky moment is that countries that were close to, to the Ukraine had a very different experience from the

00:47 - conflict compared to other countries in the European Union before the Russian invasion. And this is something that we try to, test further in, in our research before, the Russian invasion in, in the whole of Europe, there has been a, a buildup of in, in terms of defense spending, increased, production and so on. but this was most notable in countries that were closer to the Ukraine.

01:17 - second of all, what what we observe is that if you look at the investment in stocks, which is something that we will utilize specifically to looking at the weapon investments, is that before, a certain time the trends between all countries in the European Union, they were very, very similar. So what we try, to see is that this very salient moment when, Mr. Zelinsky was elected as president when he wanted

01:48 - to change the constitution of the Ukraine to become member of, nato. And when he visited Brussels, yen Stoltenberg at the NATO headquarters, where he spoke about joining NATO specifically. And all these moments happened in 19, in the second quarter of 2019. And this is a, a moment that has been very strong in the recollections of people and investors who are close to the Ukraine.

02:18 - Whereas if, whereas if you look at survey data or Google Trends data, other investors in the European Union, they didn't perceive this moment as a big major geopolitical shift that was occurring. So economists then have like a toolkit. We have two groups. One is being treated by a massive moment, namely the zelinsky moment when a new president came into power, whereas other countries in the European Union, they were not really noticing about the significance

02:50 - of this situation. So we try to, to see if, the geopolitical factors and awareness Can actually explain weapon allocations in weapon stocks specifically. and that's, that's what we try to do in our research. There are, there are several areas of interest here. So if you look at a, economic geography point of view, it is well known that investments follow a spatial dimension.

03:22 - So investors tend to invest more close to home. there is this in finance, this home bias that we, we, we put too much in our home market compared to the world market. So what we, what we think here is having an event like this, election of zelensky is a nice way to expose if this affected the investment allocations across this geographical proximity dimension to the Ukraine. So a second thing where I think that our study contributes is the, the finance literature.

03:58 - So in the finance financial economics, well, we talk about here weapon investments. So a very specific asset class for what we're trying to study. And in this very specific asset class, it's sometimes considered like a sin stock. And sin stocks are a financial asset category, which includes things like tobacco, gambling, pornography, which some investors out of principle exclude from their portfolios.

04:30 - And this sin stock bucket often also includes weapon investments. So knowing that certain investors would shade away or shun these investment, categories you would expect as an investor to actually gain, outperformance or as we call an access returns on these investments, positions. And this is also what we exposed, have seen that once Russia invaded the Ukraine, once the war in Ukraine started stock prices of firms like Ray Technologies,

05:03 - Northern Groman, in, in here in Europe, in Germany, Rhine Maal in, in Italy, you have Leonardo, those stock prices skyrocketed. And there are also, scientific studies, event studies that show that these stocks had massive outperformance. So that's from the financial, economic, literature side. But if you look from a, sustainable investment, position, again, I already mentioned sometimes investments in weapons are seen as controversial.

05:36 - a sustainable investor, would exclude these stocks. So with a major geopolitical shift at your border, are you going to maybe change your fundamental reasons for shunning certain investment categories? And this is then maybe the last thing when I think about the Literature, is this behavioral aspect. If you are, let's say an investor in a former so yet country and you perceive the potential threat of an invasion, you, you, you might want to adjust your portfolio for two reasons.

06:16 - The first one I mentioned, maybe you think you can get financial returns out of it once the conflict escalates. Secondly, more behavioral aspect is, well, in the past when wars broke out, people, they started to take nice diamond rings as an insurance policy. We call this hedging. So you could do the same now in the modern financial markets with stock investments, a global weapon industry market where you would put your money not in diamond rings

06:47 - as a hedge, but you would actually hedge by putting your money in weapon arm producers. And there's also a study, that that shows that when you look at the behavioral aspects of investors and, and especially households that, the households that are closer to the Ukraine, they were much more aware of all the troubles that could lay ahead of them as soon as Mr. Zelinsky got elected as president, which we adopt the zelinsky moment.

07:19 - And researchers from, for example, the Budes Bank, Renco and others, they, they show that the in survey data that the geopolitical risk that were perceived, they were much, much higher in former so states, and there was much greater attention than in other European Union countries. And this is also something that we, try to do with Google trends data. So we have massive data searches on, on, on Google from households, from investors.

07:51 - And what we see is that when Mr. Linsky got elected in these, former Soviet countries, or maybe even if you look at the Iron Curtain countries, there were massive, massive searches for zelensky. Whereas in the other European Union countries, there was not any significant change in search behavior on Zelensky. And this of course, all changed on, on the February 24th in 2022 when Russia inve invaded. Then search behavior

08:24 - for Zelensky across the European Union became very, very similar. So we have this difference in timing that we can later utilize, to test our theories. so we, we, we start off with, with getting a list of weapon manufacturing data from, an, institute in, in Oslo, it's called cpri. And they have a, a database on on arms where they track firms and their, their arm sales and military spendings.

08:52 - And we try to link that to stock market data. And, and this is what we put in the paper. It's available for anyone for future research as well. And that we can link to this unique data set that, that, the Euro system has under the realm of the European Central Bank. It's called the securities holding statistics, where we observe stock by stock investments from, for example, Dutch households or French insurance corporations or German banks.

09:21 - So it's across the economy, we can track these positions and it also includes countries that are, not part of the Euro system, but are part of the European Union countries like Geria, Romania, Poland, they're all also included in this dataset. So what we, we can do, once we track these two, we can actually map how weapons stock investments evolved over the period. And already to give a brief, sneak preview before Mr. Zelinsky election, the investment in weapons stocks,

10:00 - they were very, very similar across current across countries. So there was not any financial gain or news attention that made a shift between these two investors. So the nice thing with these securities holding statistics is that we can really, really track the portfolios across these different countries, different type of investments over time.

10:23 - And this data, set has also been greatly used in, in prior research. So for example, I myself did a literature and I'm, I'm counting almost a hundred scientific studies already with this dataset. but this has been mostly done in, in, banking and finance and monetary economics field where I come from, but not in, in the political, of, of, of this study. So we do a, a standard regression where we, want

10:51 - to explain the, the holdings by sort of what, what is sort of the treated group, which are the countries close to, to the Ukraine in, after the election of Mr. Zelinsky. And this is a, a difference in difference model where we can compare the reactions in terms of the, the arms investments between these two group of countries and everything that is different that would be attributed to the event of Mr. Zelinsky election. So the major result for us is that we look at three lines to explain the differences

11:27 - across these investors, that that is the, geographical proximity, political factors, and the attention effects. And all, all of these three factors seem to indicate that countries that are closer to the Ukraine before the Russian invasion, but after the election of Mr. Zelinsky, the Zelinsky moment Massively increased their investments in weapons stocks. So this is a very, very particular niche group of investments,

12:02 - and I think it that is almost like a quasi experimental setting to really show that these investors chose to put their money, their portfolio holdings in the, in this group of assets. So to give you an example, countries that were in close proximity to the Ukraine, they increased their holdings in, in this short time window of more or less one, one year with 30, 32% more than other European investors did over that period. And if you look at the countries that were part of the,

12:33 - the Iron Curtain, they increased their holdings almost with more than a hundred percent more than those that are in the European Union, but not under former Soviets, influence, so to speak. And if I would show, one single picture, you would see, a divide across the distance to Kief where you very, very clearly see that investors close to, to kief, they massively increase their weapon stock investments, whereas actually those further away, they actually have

13:11 - decreased their holdings of weapon stocks. A lot of researchers looking at the, at, at the war in Ukraine, they will focus on the period from the invasion. But there's actually a lot things happening before the invasion, especially when there was a change in, in, in regime in Ukraine, which was very noticeable. When you also speak to people who are from former Soviet states, it was a very massive shift.

13:40 - You see that in survey data. There's also, other Euro barometer data that indicates this was already a major shift happening before, and we can track that same shift within the weapons stock investment. So the closer you are since the Zelinski moment, it has had, there was the major shift already occurring. And, the, the, the key question that we actually cannot answer, but this is sort of the interpretation of our study, is

14:09 - that either these investors were in a way very, very smart because they had better information about the potential of, of, of buildup, to the conflict. And the election of Zelinsky was sort of a wake up call moment to actually put your money in these weapons stocks, which will actually give you massive outperformance. So that will be more of the, the rational, financial gain, type of interpretation. The other interpretation is

14:39 - that these investors were actually really, really scared of a potential Russian invasion. And if you are really, really scared, you need to hatch yourself, and that this could be a very good hatch, or flight to safety, so to speak. that we, we also know from the financial literature, that has actually occurring here in the, in the geopolitical, SMOs.

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