How the Invasion of the Ukraine is Impacting the U.S. and Global Economy
The invasion and continued fighting in the Ukraine has upended the lives of thousands of people in that country and caused upheaval in many industries around the globe. SNHU economics instructor Dr. Nicole Bissessar explains some of the economic impacts that have already happened and others that may be on the horizon.
How does Russia’s attack on Ukraine have an immediate impact on the U.S. and other economies?
Before Putin’s troops invaded Ukraine on Feb. 24, the global economy was already under strain from surging inflation, tangled supply chains and tumbling stock prices.
Russia’s attack on Ukraine had immediate economic impacts here in the U.S. and they were felt across the globe. Effects such as rising energy and oil prices, higher food prices due to supply chain issues, higher transportation and airfare costs, travel restrictions, stock market jitters with stock price volatility and the looming threat of more inflation as the Fed hikes the federal funds rate.
Why is there an impact on gas prices in the U.S. and how does that rise in fuel costs impact our wallets?
Russia exports 5 million barrels of crude oil a day, which represents 12% of global trade, making Russia the No. 3 rank on the world's oil production market, according to the U.S. Energy Information Administration. There is growing concern that Vladimir Putin could retaliate against U.S. sanctions and use both natural gas and crude oil as weapons against the West. The U.S. sanctions freeze the assets of Russian oligarchs, banks, and parliamentarians; restrict the sale of Russian debt, and have imposed severe economic costs to Russia.
Should Putin decide to retaliate at any time by reducing crude oil supply, he will leave oil prices in an extremely volatile position and consumers can expect to pay more at the pump. JPMorgan has warned that oil would spike to $150 a barrel if Russia’s exports are cut in half. That would translate to a roughly 41% increase from the recent high of nearly $106 a barrel. The current U.S. national average for regular gasoline already stands at $3.61 per gallon, and according to AAA, should Russia cut oil exports, we can expect to pay up to 8 cents more a week or 25 cents more a month at the pumps. All of which will severely shrink our wallets.
What are the anticipated effects on the U.S. economy? How long will we see these negative impacts?
With Russia and Ukraine being large exporters of wheat and corn, as well as essential metals like palladium, aluminum, and nickel that are used in everything from cell phones to automobiles, anticipated effects have already been felt. Within days of Russia’s invasion of Ukraine, the U.S. economy had to embrace higher energy prices and supply chain disruptions. War only threatens our economy with more inflation and lower growth.
Short term effects will be less severe and contained at the expense of our government, as we have already learned from our 2009 Great Recession and 2020 Pandemic relief programs. However, there is growing concern that Putin could launch revenge attacks against the U.S. sanctions, and this could throw off our government efforts.
Over the long term, it is anticipated that a continuation of shortage of cars and new car production will be ongoing; surgical tools, prosthetics, and even sporting goods like golf clubs made from titanium will be affected; and the price of feed for livestock could increase our purchases of food and groceries permanently.
Why does the stock market take a hit, and what does that mean for both the short and long term?
It is possible that Putin may attempt to draw the U.S. into war as retaliation against our sanctions. The Ukraine conflict has generated extreme volatility in financial markets around the world making global relationships a subject on investors' minds. Throughout history, financial markets have shown sensitivity to geopolitical events that can affect prices. Within days of the invasion of Ukraine, a series of economic movements has transformed the ways countries raise money, where they buy raw materials and with whom they do business.
In the short term, eight U.S. stocks have the most on the line based on their generated revenues in Russia and Ukraine. They are PepsiCo; McDonald's; Carnival; PVH Corp (owner of Calvin Klein, Tommy Hilfiger, Heritage); Mohawk Industries (carpet and flooring); Philip Morris (largest publicly traded tobacco company); EPAM Systems (digital engineering) and Westinghouse Air Brake Technologies.
However, in the longer term, the stock market recovery from both 9/11 and the 2009 financial crisis, arguably the greatest geopolitical and economic shocks of our time, allows for calmer sentiments. Investors can shrug off fears due to the changing structure of global oil markets and lower U.S. vulnerability to energy price swings with the view that stock prices are purely psychological.
What can we do to lessen the blow to our budget?
On Feb. 22, President Joe Biden warned Americans that a Russian invasion of Ukraine – and U.S. efforts to thwart or punish it – would come with a price tag, a direct blow to our budget.
War impacts to our budget include direct Congressional war appropriations, war-related increases to the Pentagon base budget, veterans care and disability, increases in the homeland security budget, interest payments on direct war borrowing, foreign assistance spending, and estimated future obligations for veterans’ care. Totaling these expenses and 2022 Fiscal Year Congressional requests, the U.S. federal government has spent and obligated $8 trillion on the post-9/11 wars. While the U.S. has paid for past wars by raising taxes and selling war bonds, current wars have been paid for almost entirely with borrowed money, on which interest ‘still has to be paid’ and this alone totals over $1.1 trillion to date. Should Russia strike war on the U.S., President Biden's words ring true, “it will be a blow to our budget.”
How do sanctions against Russia work and do they carry a further risk to the global economy?
On Feb. 24, the United States acted in tandem with partners and allies to maximize consequences for Russia, and to show unity against the invasion of a sovereign state, to impose sanctions against Russia.
The U.S. Department of the Treasury’s Office of Foreign Assets Control imposed expansive economic measures that target the core infrastructure of the Russian financial system and further bars Russia from the global financial system. The actions target 80% of all banking assets in Russia and will have a deep and long-lasting effect on the Russian economy and its financial system.
These sanctions were designed to avoid disrupting essential energy exports. The sanctions helped dampen the surge in energy prices caused by the war and tamed disruptions in the flow of oil and gas. However, shortages arising from Russia and Ukraine being large exporters of wheat and corn, have pushed up the price of some grains and metals, which has already inflicted higher costs on consumers and businesses. In short, the Russia-Ukraine conflict raises big risks for the global economy.
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