Russia Ukraine Conflict Economic Impact

The economic impact of war can vary significantly by country. Specific sectors of the economy can also flourish during a war while other sectors struggle. This is an incredibly complicated topic with a lot of moving pieces and differing positions from experts around the world. Still, it’s possible to look at Russia’s invasion of Ukraine and make some informed predictions about how the conflict will affect certain economies, including those of the US, Europe, Russia, and Ukraine. 

How Does War Affect the Economy?

War comes with a heavy cost to life, infrastructure, and finances. It may seem uncouth to talk about the economic effects of war when people are losing their lives. Still, the economy plays critical roles in how people live.

A struggling economy that generates more poverty can contribute to illness, starvation, and higher death rates. In other words, talking about the economic impacts of war is important even though it might feel crass. 

The following insights into what economic impact the Russia-Ukraine conflict could have on global economies are in no way intended to lessen the importance of human life and freedom. 

Stagflation

Stagflation happens when a recession and inflation take place at the same time. (In fact, some economists refer to it as “recession-inflation.”) For example, you get stagflation when wages remain low even as prices increase.  

Currently, stagflation looks like a very real possibility for the United States. The real value of wages has remained steady for at least two decades. This has taken a slight toll on American consumers, but it hasn’t been terrible because inflation has remained low during the period. Between 2012 and 2020, annual inflation never exceeded 2.3%. During two of those years, inflation was below 1%.

That changed dramatically in 2021 when inflation shot up to 7%. Projections suggest that 2022’s inflation rate could near 8%. Without equally sudden wage growth, stagnation will almost certainly happen.

While it’s easy to predict worrisome stagnation in the US, it’s difficult to connect the cause to the conflict in Ukraine. As stated above, wages have been nearly flat for well over a decade. Also, inflation become a problem before Russia invaded Ukraine. 

Could the Russia-Ukraine conflict escalate stagflation? There’s a strong possibility of that, especially considering that the U.S. and other countries rely so heavily on fossil fuels. As the costs of gasoline and natural gas increase, the prices of other products will follow.

Economic Sanctions

Several countries, including the United States, have already leveled economic sanctions against Russia for invading Ukraine. The UK, US, and EU countries have been particularly aggressive.

The UK and EU have banned all luxury goods exports to Russia. These goods include fashion, cars, and art. The UK and EU have also levied a 35% tax on all Russian liquors. The US hasn’t banned Russian liquor, but it might not need to, considering how many bars, stores, and suppliers have independently chosen not to purchase and sell Russian alcohol.

The US, along with several other countries, has banned selling “dual-use goods” to Russia. Dual-use goods are products that can be used by the military and civilians, such as certain chemicals. Obviously, the U.S. wants to prevent sending any potential military supplies to Russia.

Countries are not taking these sanctions lightly. Authorities in Europe have already started a probe into whether manufacturing company Bosch violated EU sanctions by sending military vehicle parts to Russia.

The question of sanctions against Russia will likely become more complicated as the crisis continues. The US has already made mild threats to sanction China if it provides certain types of assistance to Russia. Some experts on the matter, however, believe that China can’t save Russia’s economy. Its help could only prolong an inevitable collapse as the rest of the world pulls away from Russia.

Oil and Gas Prices

Russia is the second-largest oil producer in the world. (The United States is the world’s largest oil producer.) Russia is also the second-largest producer of natural gas in the world, although it lags far behind the United States in this category.

Gas prices started climbing even before President Biden announced that the US would no longer import oil from Russia.

Even though the U.S. produces more oil than any country, it still imports barrels from Canada, Russia, Mexico, Saudi Arabia, and several other countries.

In fact, Russia isn’t even a major supplier for the US. About 408 million barrels of oil come to the U.S. from Russia per day. Yes, that sounds like a lot. Compared to Canada’s 4.08 billion barrels per day, though, it’s not that much.

Since oil is a global commodity with prices largely established by OPEC, the cost will go up as countries refuse to acknowledge Russia’s supply.

According to the U.S. Energy Information Administration, the average cost of gasoline was $1.841 in April 2020. The abnormally low price was the result of less travel. Prices have surged recently, though. In February 2022, the average price was $3.517 per gallon. That hardly tells the whole story, though. 

Californians pay the highest price in the country (about $8.80 per gallon for regular gasoline). Hawaiian drivers can expect to pay about $5.12 per gallon.

To make matters much worse, prices have become extremely volatile. Although the average price per gallon was $3.57 in February, the average now is $4.27. 

How the Euro, Ruble, and US Dollar Are Affected

Russia’s invasion of Ukraine has also affected the value of global currencies. Understandably, the Russian Ruble has taken a serious beating.

In February 2022, the Ruble was worth $0.013. During mid-March, it tumbled to $0.0075. It has managed to climb back to $0.009, but that’s still significantly lower than a couple of months ago.

In February, you needed about 77 Rubles to buy $1. Today, you need 111 Rubles to buy $1. To put it another way, the Ruble has lost about 30% of its value within one month.

The American Dollar has done pretty well during the conflict. In late February 2022, $1 could buy about €0.90. Around the day of the invasion, $1 could buy €0.93. That’s not a considerable difference, but it does influence large-scale international trade. At the time of writing, $1 was back to €0.90.

The Euro has lost a small amount of value during the invasion. In mid-February 2022, €1 was worth $1.13. Since then, it has lost about $0.02 in value. Again, that’s not a tremendous change, but it does affect trade somewhat.

It’s important to note that the currency fluctuations seen in the US and Europe are normal. The amount of loss that the Ruble has experienced, though, will put Russia at a serious disadvantage on the world stage.

How War Affects Inflation

Most people believe that war stimulates the economy. Or, at least, it stimulates the American economy.

The United States has a lot of defense contractors that manufacture the weapons and defense systems that other countries need. Selling everything from advanced radar systems to airplanes adds to the US GDP.

A look at the timeline of the U.S. GDP shows steady growth from after the Great Depression to the present day (of course, there are some short-term dips, such as during the Great Recession). Consumption tends to follow a similar plot, largely because consumer spending drives GDP.

A closer investigation shows other factors can damage the economy during military conflicts. For example, World War II created a large bump in GDP. Prices also went up at the same time, though. During the Korean War, the GDP barely budged, but inflation grew.

Interestingly, GDP grew during the Vietnam War, but only because the government spent so much money fighting overseas. Consumption remained flat and inflation spiked several times during the war.

It’s impossible to know for sure how the Russia-Ukraine war will affect inflation in the United States. We already know that the country is experiencing a high inflation rate that started well before Russia invaded Ukraine. Military intervention could give the appearance of economic growth by forcing the government to spend more money. At the same time, consumers may face even higher rates of inflation.

How Economically Strong Is Russia?

In late 2021, the World Bank published a report praising Russia’s economic growth even as it continued to struggle against the pandemic. The pre-invasion report warned that inflation could increase, which would hamper ongoing growth. According to the study:

Uncertainty around inflation remains high. Should inflation prove more persistent than expected, or if the economy faces headwinds, including from the Federal Reserve’s planned unwinding of quantitative easing in the United States, monetary policy may need to be tightened for longer, which may also adversely affect the growth outlook.

Seeing as how the Ruble has lost so much value recently, it’s hard to imagine that Russia can overcome the obstacles described by the World Bank. Economic sanctions will add to its woes.

Some people believe that China will come to Russia’s assistance. The U.S. has said that it will leverage economic sanctions against China if the country helps in a significant way. Will this persuade China to stay out of the conflict? Time will tell.

Regardless, China probably doesn’t have enough money to support Russia for very long. It’s fully focused on growing its own economy. Giving too much to Russia would likely set it back, which the Chinese government might find unpalatable.

Does Ukraine Have a Good Economy?

Ukraine had a healthy economy as of 2020. After a prolonged recession, its economy began to grow in 2017, putting it back on the path to success.

Does the country have a good economy now? That seems very unlikely considering that everyone from teachers to doctors are either fleeing the country or taking up arms against invaders.

It’s certainly hard to grow an economy when everyone has to fight for the simple right to exist.

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