The Russian invasion of Ukraine could have economic repercussions globally and in the United States, increasing uncertainty, driving commodity markets to a frenzy and potentially pushing inflation as gas and food prices rise around the world.
Russia is a major producer of oil and natural gas, and the geopolitical conflict has pushed prices of both sharply up in recent weeks. It is also the world’s largest wheat exporter and a major food supplier to Europe.
The United States imports relatively little directly from Russia, but a conflict-induced commodity crisis could have knock-on effects, at least temporarily pushing up prices for raw materials and finished goods, while much of the world, including the United States, suffers from rapid inflation.
Global turmoil could also deter US consumers, forcing them to cut spending and other economic activities. If the slowdown were to become severe, it could make it more difficult for the Federal Reserve, which plans to raise interest rates in March, to decide how quickly and how aggressively to raise borrowing costs. Central bankers noted in minutes from their most recent meeting that geopolitical risks “could cause increases in global energy prices or exacerbate global supply shortages” as well as posed a risk to growth prospects.
The extent of the potential economic fallout is unclear, but a foreign conflict could further delay a return to normalcy after two years in which the coronavirus pandemic has ravaged both the global economy and the US economy. US consumers are already battling rapidly rising prices, companies are trying to navigate coiled supply chains and people are reporting that they are pessimistic about their financial prospects despite strong economic growth.
“The level of economic uncertainty will increase, which will be negative for households and businesses,” said Maurice Obstfeld, senior fellow at the Peterson Institute for International Economics. He noted that the effect would be felt most acutely in Europe and to a lesser extent in the United States.
An important and immediate economic implication of a confrontation in Eastern Europe is related to oil and gas. Russia produces 10 million barrels of oil a day, about 10 percent of global demand, and is Europe’s largest supplier of natural gas, which is used to fuel power plants and heat homes and businesses.
The United States imports relatively little Russian oil, but energy commodities markets are global, meaning a price change in one part of the world affects how much people pay for energy elsewhere.
The oil price rose to 105 dollars a barrel on Thursday. If oil prices soar to $120 a barrel at the end of February, and hovered around $95 last week, inflation, as measured by the consumer price index, could rise nearly 9 percent over the next few months, rather than a currently forecasted rate. peak of just under 8 percent, said Alan Detmeister, an economist at UBS who previously headed the Fed’s prices and wages division.
“It’s going to be a question of, how long will oil prices, wholesale natural gas prices stay high?” he said. “Everyone can guess.”
The $120 a barrel cap for oil is a reasonable estimate of how high prices could go, said Patrick De Haan, chief of petroleum analysis at GasBuddy. That would average about $4 a gallon at the pump, he said.
It can be difficult to determine how much of the change in energy prices is attributable to the invasion. Omair Sharif of Inflation Insights noted that oil and gas prices had already risen this year.
“I don’t know when you want to start the clock that Ukraine is going to be a major headline,” said Mr. Sharif. Plus, from a US inflation perspective, how much the conflict matters “all depends on how much the United States gets involved.”
Oil may be the most important story when it comes to the inflationary effects of a Russian conflict, but it is not the only one. Ukraine is also a major producer of uranium, titanium, iron ore, steel and ammonia, and a major source of Europe’s arable land.
Christian Bogmans, an economist at the International Monetary Fund, said a conflict in Ukraine could further push global food prices, which would stabilize after skyrocketing last year.
Russia and Ukraine together are responsible for nearly 30 percent of global wheat exports, while Ukraine alone accounts for more than 15 percent of global corn exports, he said. And many of Ukraine’s wheat and maize growing areas are near the Russian border.
Rising gas and fertilizer prices, as well as drought and adverse weather conditions in some regions, such as the Dakotas, had already helped push up the world price of wheat and other commodities. Ukraine is also a major producer of barley and vegetable oil, which are used in many packaged foods.
“Production may be interrupted and shipment may also be affected,” said Mr. Bogmans. If other countries impose sanctions on Russian food products, it could further curtail global inventories and push up prices, he said.
Russia’s attack on Ukraine and the global economy
An increasing concern. Russia’s attack on Ukraine could cause staggering increases in energy and food prices and deter investors. The economic damage from supply disruptions and economic sanctions would be severe in some countries and industries and undetected in others.
But because food costs are a small part of inflation, that may not make much of a difference to the overall price data, said Mr. Detmeister from UBS. It is also difficult to guess exactly how entry prices would develop due to the potential for currency movements.
If the conflict creates global uncertainty and prompts investors to pump money into dollars, raising the value of the currency, imports from the United States could become cheaper.
Other trading risks loom. Turmoil at the interface of Europe and Asia could pose a risk to supply chains disrupted by the pandemic.
Phil Levy, chief economist at Flexport, said Russia and Ukraine are far less connected to global supply chains than China, but the conflict in the area could disrupt flights from Asia to Europe. That could pose a challenge for industries that transport products by air, such as electronics, fast fashion and even automakers, he said at an event at the National Press Foundation on Feb. 9.
“Air has been a means of getting around supply chain problems,” said Mr Levy. “If your factory were to close because you didn’t have a key part, you could fly into that key part.”
Some companies may not yet realize their true exposure to the crisis.
Victor Meyer, the chief operating officer of Supply Wisdom, which helps companies analyze their supply chains for risk, said some companies were surprised by the extent of their exposure to the region during Russia’s 2014 invasion of Ukraine when it launched the Crimea annexed.
Mr. Meyer noted that if he were a chief security officer of a company with ties to Ukraine, “I would argue quite strongly for my exposure to be reduced.”
There could also be other indirect effects on the economy, including shaky consumer confidence.
Households are sitting on cash supplies and could probably afford higher prices at the pump, but rising energy costs are likely to make consumers unhappy if prices in general are already rising and economic sentiment has swooned.
“The blow would be easily cushioned, but it would make consumers more miserable, and we must assume that a war in Europe would also directly erode confidence,” Pantheon Macroeconomics’s Ian Shepherdson wrote in a Feb. 15 note.
Another risk to US economic activity may be underestimated, Obstfeld said: the threat of a cyberattack. Russia could respond to United States sanctions with digital retaliation, accelerating digital life at a time when the internet has become central to economic existence.
“The Russians are the best in the world at this,” he said. “And we don’t know how much they’ve burrowed into our systems.”
