Insights: Russia-Ukraine Conflict

Is Russia’s war in Ukraine economic roulette?

Though not unexpected during the preceding weeks, Russia’s invasion of Ukraine on February 24 changed the economic landscape for the global economy. Potential consequences for the U.S. economy could be significant and appear to be mostly negative.

Unless it spreads beyond Ukraine, the war in eastern Europe is unlikely to spark the dramatic economic swings we saw from the pandemic, but it certainly could exacerbate the challenges resulting from the pandemic, such as inflation and supply chain disruptions. War introduces further challenges for forecasters because, unlike a global pandemic, it can literally end in a matter of days or escalate instantly into the unthinkable.

War’s human toll is severe and tragic, but we must acknowledge that the same is not necessarily true for individual sectors of the U.S. economy. The consequences and disruptions of war in eastern Europe could create not only losers but winners within the U.S. economy and freight markets.

Huge impact on commodities

Russia boasts a huge landmass that is rich in minerals, so the prospects of a major disruption in the production or distribution of those resources – either from the war itself or due to global sanctions against Russia or Russia’s response – could have far-reaching consequences on supplies and pricing.

Because energy is core to all industrial production and daily life, the war’s effects on the petroleum markets are perhaps the most important of all. Russia supplies about 11% of the world’s petroleum and is a close competitor with Saudi Arabia for the distinction of being the world’s second-largest petroleum supplier behind the United States. Not surprisingly,  the most immediate effect of Russia's invasion of Ukraine was the severe impact was in energy costs.

Stoking more inflation 

In isolation, a war between Russia and Ukraine is a big deal, but it comes as the U.S. consumer already faces the strongest inflation in 40 years. Through February, which was only indirectly affected by the impending invasion, the Consumer Price Index (CPI) for all items was up 7.9% over the past 12 months. That is the strongest 12-month gain since January 1982. Even excluding the volatile food and energy sectors, the CPI was up 6.4% during the 12 months ended in February for the largest such gain since August 1982.

With gasoline prices surging to record levels, record inflation in March is a sure bet. Whether core inflation also will be a record is less certain, but it seems likely given broad-based concerns over the supply chain impacts of the war.

Potential direct threats to the U.S. economy

The prospects of U.S. direct involvement in the war appear highly remote, but in the 21st century, armed conflict is not the only national security implication of geopolitical tensions. Indeed, economic sanctions such as those already imposed by the U.S. and Europe on imports and financial transactions certainly are a type of warfare.

Russia has its own potential economic moves, including withholding exports of key industrial commodities, although those moves potentially hurt the Russian economy as well. Meanwhile, economic pressure on Russia has potential negative consequences for U.S. and European firms doing business with Russia. To some extent, Russia and the West already are engaged in a game of economic chicken that could expand.

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