What is the Primary Global Economic Fallout From the War in Ukraine? 

Aside from the substantial and devastating human suffering, there are several other ways the impact has been or could be further felt abroad.

‘Indirect warfare’. This encompasses supply of arms, necessities, and intelligence to Ukraine from the West and other regions. While it’s been made clear that U.S. forces will not be directly involved on the field, all bets are off if nearby NATO borders are threatened (including Poland, Romania, and the Baltic states). Other tactics involve cyberwarfare, which could be hampered on the Russian side if hardware/software technology embargoes are kept in place, or even internet access blocked altogether.

  • Chinese participation remains a wildcard. While there had been a loose but strengthening alliance with Russia (to offset Western economic power), it is unclear the Chinese will violate sanctions policies, which could threaten their own trade interests with the rest of the globe. China has also been philosophically opposed to violations of national sovereignty by meddling neighbors, which has led to surprisingly strong condemnations of Russian military actions.
  • There has been increasing concern that Russian actions toward Ukraine may have emboldened a potential similar action by China towards Taiwan. This has more significant economic implications, due to Taiwan’s role in global semiconductor manufacturing. A variety of national security experts don’t appear to view this as an immediate threat.

Inflation effects. These are due directly to higher commodity prices. A significant majority of Russia’s GDP is tied to natural resources extraction (perhaps two-thirds). Due to sanctions, the products taken offline immediately decrease supply and raise costs at a time when Covid is waning—and more ‘normal’ demand is rising. This is a ‘perfect storm’ to some extent.

  • Crude oil. As a member of OPEC+, Russia has long been a key energy producer. Per the U.S. Energy Information Administration, it’s the second-largest, behind the U.S., and roughly tied with Saudi Arabia—at just under 10 mil. barrels/day—much of which is exported to Europe and Asia. Per the Capital Group, this represented 12% of global energy production in 2020 (however, less than 5% of U.S. oil imports). More directly, diverting purchases away from Russia benefits other producers in the Middle East. However, it creates a more difficult situation for net energy importers, such as Japan and India, where rising prices can put the brakes on growth. Interestingly, there has been evidence of increasing ‘self-sanctioning’ by major oil companies, which have been moving away or shutting down Russian operations and partnerships outright. In fact, at recent oil auctions, Russian barrels have been the outcast, with price discounts of up to $20/barrel vs. oil from other regions, as buyers are not buying. Pressure has been mounting on the U.S. political side to ban Russian oil completely, which is a significant step. This may not last indefinitely, but has shown the strong resistance of the international community toward sectors at the heart of Russian revenue generation, and hence, funding the Ukrainian war effort. It also raises pressure to agree to a renewed Iran nuclear deal, in order to get their oil production back online.
  • Natural gas. This is a tricky commodity and volatile in price—dependent on local inventory and near-term weather conditions. Unlike crude oil, it is difficult to store and transport, making pipelines the most effect method for getting it from point A to point B. (Condensing and liquefying natural gas into ‘LNG’ is increasingly possible, but less efficient or cost-effective to ship over long distances.) This dynamic has resulted in Russia providing Europe with almost half of its natural gas needs (an estimated 40%, per Reuters) and 17% of global supply (Capital Group, as of 2020). Several countries, such as Italy, are dependent to an even larger degree. This is the primary reason why energy has been exempted from export and SWIFT bank payment sanctions so far, although the threat of deeper cutoffs remain if situations worsen. There is both pressure from the West to move away from Russian gas, and pressure on Russia to keep the spigots open, due to this being a key source (among few) of ongoing revenue to keep the government afloat.
  • Agriculture. Ukraine and parts of Russia have been known as the ‘breadbasket’ of Europe, due to a climate well-suited to grains, particularly wheat and corn. The two provide 30% of global wheat exports (per the University of Illinois Agriculture, Consumer and Environmental Sciences Dept.), as well a substantial contribution in products such as sunflower oil. Along with an already-challenged growing season due to poor weather in some regions, the new war and reduced ability to harvest crops has already driven prices sharply higher. The U.S., Canada, and other European producers will be forced to take up the slack. On a broader note, as we saw with the Arab Spring a decade ago, higher food prices represent one of the most potentially dangerous situations a closed political system can encounter—as it has been the catalyst for many populist uprisings over the centuries.
  • Metals/other. Russia remains a key exporter of palladium and aluminum, in demand as the global economy continues to reopen from Covid. Ukraine is a key producer of neon, which is technically a gas, still used in signage to a smaller degree, but more critical in the manufacturing process of semiconductors (which is already challenged).

Economic growth.

  • Higher inflation and war each have the historical tendency for depressing growth, depending on the magnitude and supply chains affected. (We’ve heard the Covid pandemic described as ‘war-like’, which wouldn’t be a bad analogy from a historical standpoint.) Inflation at times has been a byproduct of faster growth, but in this case exacerbated by supply/logistics disruptions and an engorged monetary base from fiscal stimulus. The Ukraine war remains regional, without broader spread, and the smaller size of the two nations from a global GDP standpoint has kept further impact contained. But, as noted, each country’s impact is in the commodities sector, with the availability and price of petroleum, grains, and metals important inputs into the prices of goods manufactured elsewhere. Ongoing high prices either pressure costs on manufacturers, causing margins to shrink, or is passed through, to consumers, which lowers spending power. Rising political pressure over the weekend to sanction Russian oil pressures inflation even higher, with a scramble for other producing nations. Broader wars can divert spending away from consumer goods towards war armaments, which can have a mixed effect on growth for a period.
  • Foreign sanctions have been meant both as a deterrent, but more as a punishment, as they’ve been described by foreign policy experts. Energy has been largely exempted from sanctions thus far, due to Europe’s reliance, but this is subject to change if public sentiment around the Ukraine war worsens (which it has). Consumers ultimately bear the brunt of higher energy prices, and this has been described as a potential Jimmy Carter-esque ‘turn down the thermostat and put on a sweater’ moment, at least in Europe. For Russia, ongoing sanctions that are not lifted run the risk of turning it into a ‘pariah’ state, along the lines of North Korea, Venezuela, and Iran.
  • Energy wildcard and recession risk. There have been some parallels between today and the situation in the early 1970’s, which included the Yom Kippur war in the Middle East, and related oil embargo. Crude oil has the unique ability, if high prices are persistent, to be a catalyst for recession by itself. On the positive side, the global economy is less petroleum-dependent than it was in the 1970’s, although green technology has not completely replaced it, either. (Political disagreement about U.S. oil and gas production during the transition period reflects this difficult challenge.) The price of oil has been historically volatile, and quick to react to changing supply and demand conditions. In the last 15 years, starting just prior to the financial crisis, saw West Texas crude in a range from ‘below zero’ in early 2020 (when they were giving away barrels due to storage issues) up to $150.
  • Cooperation, especially with and within Europe. One of the few positives in this situation has been the strong and decisive action between the U.S. and European nations. Following recent years where globalization may have peaked, stronger trade ties have generally been beneficial for growth.

Monetary policy.

  • This represents one of the more difficult environments in years. The U.S. Fed to the largest degree, but also the ECB, face high inflation readings, which point to the need for higher interest rates. At the same time, strong economic growth is tempering, which could be hampered further by high inflation as spending activity decelerates. Rate hike expectations haven’t been derailed, but earlier estimates of a potential 0.50% March hike and up to eight hikes in 2022 now seem overdone; a moderated pace of up to perhaps six quarter-point hikes seems much more likely at this point. However, conditions are subject to change as inflation pressures remain persistent and growth projections remain fluid.

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