Finance

Five ways the Russian invasion of Ukraine could impact the US economy

The Russian invasion of Ukraine and the unprecedented sanctions imposed in response by the U.S. and western allies have rattled the global economy and financial markets. 

They’ve also upended supply chains for crucial food, energy and industrial products amid a global burst of inflation, derailed global travel and driven volatility into the stock market.

Here are five ways the Russian invasion of Ukraine impacts Americans. 

Energy and oil prices rise

Oil prices skyrocketed Monday as Russia’s invasion of Ukraine entered its fifth day and the U.S. and European Union continued to ratchet up sanctions, with Brent crude topping $100 a barrel. 

In 2020 alone, Russia was the third-biggest supplier of foreign petroleum for the U.S., according to the U.S. Energy Information Administration, and responsible for 7 percent of imported oil. Russia also exported $13 billion in mineral fuels to the U.S. in 2019, accounting for more than half of all such imports sent to America.  

Notably, prices are rising even though sanctions imposed on Russia have so far excluded the energy sector, a decision President Biden said he made in order “to limit the pain the American people are feeling at the gas pump.” 

But Thierry Bros, a gas analyst and professor at Sciences Po Paris in France, told The Wall Street Journal oil prices will continue to remain “extremely volatile” because “Vladimir Putin could at any time decide to reduce supply.”

On Monday, the national average was $3.62 a gallon and prices “will likely continue to rise as crude prices continue to climb,” according to AAA. The average U.S. gas price was about $2.71 one year ago, though that increase had started before Russia began massing troops at its border with Ukraine.

“Russia’s invasion and the responding escalating series of financial sanctions by the U.S. and its allies have given the global oil market the jitters,” AAA spokesperson Andrew Gross said in a statement.

“Like the U.S. stock market, the oil market responds poorly to volatility. It’s an explosive situation, and a grim reminder that events on the far side of the globe can have a ripple effect for American consumers.” 

The Journal reported that the U.S. and other major oil-consuming countries were weighing the release of 70 million barrels of oil from emergency stockpiles in response to the rising crude prices.

Supply chain issues for farmers could drive higher food prices

Farmers in the U.S. are bracing for a hike in the price of fertilizer, which was already at a record-high before the conflict. 

Russia — which is a low-cost, high-volume global producer of fertilizers — is the world’s second-largest producer after Canada of potash, a key nutrient used on major commodity crops and produce, according to Bloomberg. 

Even before the Russia-Ukraine crisis reached a boiling point, the Iowa Capital Dispatch reported that farmers in the United States are likely to plant less corn and use less nitrogen fertilizer on their fields for next year’s growing season due to sky-high fertilizer prices and short supplies.

Agriculture Secretary Tom Vilsack said Thursday that his biggest concern about the invasion’s immediate effects on U.S. agriculture is price gouging by fertilizer companies, “and we’re obviously going to keep an eye on that.”

“According to our experts, potash and fertilizer producers do have the ability to ramp production as needed. The real question is how long until incremental volumes would actually flow through the supply chain into retailers and ultimately to farmers,” Patrick Donnelly, a senior analyst at Third Bridge told The Hill. 

“The most immediate impacts will be further inflation in agricultural commodities and ultimately food prices. Americans should expect to be paying more for their grocery bills this upcoming year,” he added. 

Travel restrictions and rising airfare costs 

Ukraine has closed its airspace and an increasing number of airlines canceled flights in an out of Russia. A number of countries, as well as the EU, have closed their airspace to Russian carriers.

“We’ve already seen a tit-for-tat between the U.K. and Russia in terms of closing airspace, and the FAA has restricted commercial aircraft from flying over Ukraine, Belarus and parts of western Russia. These restrictions, if they hold or are expanded, have the potential to drive fares to the Middle East, Africa and Asia higher,” Willis Orlando from Scott’s Cheap Flights told The Hill.

Even those traveling far outside the conflict zone could be affected.

“The crisis is bound to contribute to already high oil prices. Jet fuel is one of an airline’s biggest expenses, so it follows that persistently high fuel costs might be reflected in slightly higher fares,” Orlando said.

However, the effect of higher fuel costs on which fares are available is bound to be “tempered by the extremely competitive fare environment we’re currently in,” Orlando added.

“Airlines are grappling constantly to capture renewed demand for flights, which is resulting in frequent fare sales, even as average fares have crept higher in recent weeks,” he said. 

Stock market volatility

Stocks have fallen steadily throughout the year as Russia amassed troops on its border with Ukraine and markets braced for a major conflict. The arrival of war and the unprecedented sanctions imposed on Russia could continue to cause wild swings as the financial sector heads into uncharted territory.

The Dow Jones Industrial Average has fallen more than 7 percent, the S&P 500 index is down more than 9 percent and the Nasdaq composite has fallen roughly 13 percent since the start of 2022, and investment experts are bracing for more speed bumps after years of torrid gains.  

“Managing risk is key to a good investing plan, but geopolitical risk is difficult to plan for,” wrote Lindsey Bell, chief markets and money strategist for Ally,  

“The ongoing Russia-Ukraine geopolitical crisis may be pressuring stocks right now, but history suggests these dips could be good buying opportunities for long-term investors. While there is more than just geopolitical risk to consider in this situation, it’s quite possible that before you know it, the Fed will be back at the top of our wall of worry.” 

Faster Fed rate hikes 

Higher energy and food prices and deeper supply chain bottlenecks could put pressure on inflation and force the Fed to accelerate its pending series of rate hikes.

The Fed was already poised to hike interest rates several times this year, beginning next month, after inflation rose well above levels the bank expected. Prices rose 6.1 percent in the 12 months ending in January, according to personal consumption expenditures (PCE) price index, the Fed’s preferred gauge of inflation. 

While a drop in economic activity could ease inflation, experts believe the combination of a strong U.S. economy and potentially severe supply disruptions could make the Fed move quicker to tighten rates.

“A very high inflation path in 2022 should make an easy case for steady rate hikes at all seven remaining [Fed] meetings,” wrote Goldman Sachs economist David Mericle in a Friday research note.

Mericle expects annual inflation minus food and energy prices to end 2022 at 3.7 percent, up from a previous estimate of 3.1 percent. The Fed aims for 2 percent annual inflation on average.

Tags Joe Biden Tom Vilsack Vladimir Putin

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