How a European War could affect the U.S. economy

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As we know, Russia has amassed 100,000 soldiers equipped with military tanks, fighter jets and missile launchers along the Northern and Eastern border of Ukraine, signaling a multi-pronged attack on Ukraine might be in the near future. Russian President Vladimir Putin denies plans for an invasion, but has simultaneously outlined terms from the West to prevent the unplanned invasion. The most notable of these demands is for the West to guarantee Ukraine will not join NATO, the North Atlantic Treaty Organization (or North Atlantic Alliance), an intergovernmental military alliance between 27 European countries, 2 North American countries and 1 Eurasian country.   

Ukraine shares borders with both the European Union (EU) and Russia. However, as a member of the former USSR, its citizens share deep social and cultural ties with Russia, and Russian is widely spoken there.[i] In 2014, when Ukrainian citizens voted out their pro-Russian president, Russia invaded Ukraine and annexed Ukraine’s southern Crimean peninsula. At the same time, Russia militarily backed separatists in Eastern Ukraine, noting both moves as necessary to protect Russian-speaking citizens in the area. The conflict was resolved with the recognition of a de-facto autonomy of the Donbas region in the Ukrainian Constitution via the Minsk Agreements, referenced by Putin in his meeting with French President Macron on February 7th.[ii] That same agreement reinstated Ukraine’s control over its Eastern border with Russia, which is currently in jeopardy again.

Alarmingly, Ukrainian President Volodymyr Zelensky noted Russia has issued 527,000 passports to Donbas residents this past year. This same strategy of distributing Russian passports to Crimea residents was undertaken in 2014, just prior to the regions annexation.[iii] The need to protect these people could be used again as an excuse or a pretext for possible open aggression against Ukraine. Mark Twain famously noted, “History doesn’t repeat itself, but it often rhymes.”

In aggregate, these developments have led to high tensions in the region. Some speculate Russia is using the threat of invasion as a bargaining chip to prevent any expansion of the NATO alliance. Others suspect that any invasion would stop once Russia conquers the coastline between Donbas and Crimea.[iv]

A Ukrainian invasion could destabilize Europe, and create uncertainty for global economic markets. Surprisingly, Ukraine’s agricultural production accounts for a significant amount of the world’s food supplies and they are the sixth largest producer of global corn exports.[v]

Russia, however, is a globally significant source of energy in the form of petroleum oil and natural gas. In 2020, Russia was the third largest supplier of foreign petroleum to the U.S., but that only equated to 7% of total imported oil. Russia also exported $13 billion in mineral fuels to the U.S. in 2020 which accounted for more than half of all goods sent to America.[vi] The EU is very reliant on Russia’s resources, with about 35% of their natural gas coming from Russia through a network of pipelines.[vii]  The Nord Stream 2 gas pipeline is awaiting certification to bring additional Russian gas to Germany, and was referenced by President Biden as being one of the many sanctions that would be imposed on Russia should they invade Ukraine.

Therefore, a war between Russia and Ukraine would likely lead to higher oil prices and rising inflation globally. Oil prices rose substantially already in 2021, and energy prices were up 29.3% annually in December 2021, according to the Labor Department’s consumer price index (CPI). Sanctions on Russia’s energy could push costs even higher and have a negative ripple effect on the global market. Given energy costs are a significant driver of inflation, this could lead to even higher inflation than the 7% year-over-year figure posted as of December 2021.[viii] Higher inflation and reactionary governmental monetary policy would directly affect every American family.

A Russian invasion of Ukraine may also result in a downturn in the stock market due to geopolitical uncertainty, and further disruption to the supply-demand imbalance in the commodities market. Looking back at history, when Iraq invaded Kuwait in 1990, oil prices rose, and the Dow Jones Industrial Average (DJIA) fell 16% and took 8-months to recover from beginning to end.[ix] Although the future is unknown, history has shown that the stock market is resilient and diversification is one of the best ways to protect investors from market volatility and rotational shifts. Russia-Ukraine is the current known-unknown, but there will surely be more to come. We will wait anxiously to see how de-escalation measures progress in the days and weeks to come, but be prepared for volatility in the market, whether good or bad news avails.




[iv] Bob Veres Insider Information




[viii] US Bureau of Labor Statistics via FRED as of 12/22/2021


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