Putin’s War – The Short Term Economic Impact – Part II

In the previous article, we discussed the U.S. and worldwide response to Vladimir Putin’s invasion of Ukraine, including how the private sector plays a role in levying sanctions against Russia. In this article, we’ll explore the short-term economic fallout of the war in Ukraine, with an emphasis on the U.S. economy.

U.S. Outlook

Shortly after the invasion began, stock markets in the United States and around the world took a hit. Even though Russia’s share of the global gross domestic product (GDP) is only 1.7%, compared to the U.S.’s 24%, it remains a key exporter of important goods, especially crude oil and natural gas. Russia and Ukraine also contribute a large portion of the world’s wheat, metals, and fertilizers (World Economic Forum).  As long as the war continues, the stock market is in for a roller coaster ride.

In a recent MassMutual survey, many Americans said they have or will postpone investing to avoid that volatility. Such a move is risky warns certified financial planner Dennis Morton, of Morton Brown Family Wealth, because investors may miss opportunities to invest while stocks are priced lower.

While the United States does not depend on Russian exports as much as many other countries, especially in and around Europe, gas prices have sky rocketed.   An already-high inflation rate has continued to rise, which means higher prices for food and other goods. Experts expect to see continued stock market instability, and a drop in consumer confidence.   Supply chain issues for farmers, restrictions and higher costs for airfare and other travel, and interest rate hikes are among the areas that this war is impacting. Some worry that all these ingredients could lead to an economic recession (Fox Business).

If any bright spot can be found among the clouds, it could be shining on U.S. energy companies. While the United States had become nearly 100% energy independent a few years ago, lower crude oil prices and other factors led to decreased domestic oil exploration and production. The need for other sources of oil, coupled with a rise in demand for electric vehicles and other sustainable forms of energy, could lead to renewed investment in domestic and green energy production.

Worldwide Outlook

As bad as it may be for the United States, for some areas of the world the outlook is even dimmer. Some countries are nearly 100% dependent on Russian and Ukrainian fertilizers for their crops, while others such as Egypt, Morocco, and Lebanon import as much as 80% of their wheat from the war-torn region (Reuters). Ahmed Morsy, a senior analyst with the U.S.-based Eurasia Group, called it a “double whammy” due to these nations’ dependence on Ukraine and Russia for wheat and their main important channel, the Black Sea, being cut off, is leading to higher prices. For nations facing food shortages and high unemployment rates, the temptation to ignore worldwide economic sanctions might be too much to bear.  Next, we’ll explore the pros and cons of worldwide sanctions against Russia and the war’s potential long-term impact on the U.S. and worldwide economic and political stability.