Impact of commodity prices volatility on the sovereign risk of European economies: the case of the Russo-Ukrainian conflict

Abstract

This paper investigates the impact of the Russo-Ukrainian conflict on the relationship between commodity price volatility and sovereign risk in European economies. Focusing on key agricultural commodities (wheat, rapeseed, and maize) and energy commodities (oil, gas, and coal) we examine the situation in European crop exporting and producing countries: France, Germany, Poland, Romania, Hungary, Bulgaria, Czechia, Italy, Portugal, Spain, the Netherlands, Denmark, Belgium, Finland, and the United Kingdom. Our results reveal that the spillovers originate primarily from the sovereign risk, while commodities are mainly shock receivers. Since the conflict began, the contribution of gas spillovers has increased, while that of wheat, maize, and coal has decreased. Moreover, the transmission of risks from Central Europe and Finland has also intensified. Overall, the findings suggest that geopolitical tensions drive the spillover transmission of commodity-related risk across the European Union and the UK.