Economic Outlook

Russia-Ukraine War: Economic Effects


A report from the Dallas Federal Reserve Bank assesses the impact from the Russia-Ukraine war as less sizeable than those of the 1970s’ oil shocks and more similar in magnitude to the 1990 oil shock during the first Gulf War. In part, this reflects improved energy efficiency in the U.S. since the 1970s, mitigating the higher oil prices. However, the dependence on Russian energy imports still constitutes a major global economic risk factor.

The short-term economic impacts of the war are likely limited for the U.S. since its trade ties with Ukraine and Russia are modest, although a commodity prices surge has pushed inflation higher. In general, the war has worsened the largest bout of inflation in the U.S since the 1980s. However, unlike most other countries, the U.S. can increase domestic energy production and, to some extent, 

agricultural output to partly offset shortfalls and restrain price hikes. However, the ability of U.S. producers to boost production quickly and significantly is still hindered by supply-chain bottlenecks, shortages and various regulatory, financial and technological hurdles.

According to the International Monetary Fund, the war impacts will flow through three main channels. As mentioned, higher prices for commodities such as food and energy will push up domestic inflation further, in turn eroding the value of incomes and weighing on economic demand. 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% of imported oil. Two, European economies in particular will grapple with disrupted trade, supply chains, and financial payment as well as an historic surge in refugee flows. Finally, reduced business confidence and higher investor uncertainty will weigh on asset prices, tightening financial conditions and potentially spurring capital outflows from emerging markets.

European countries have turned to the U.S. to help fill energy gaps as they seek alternative suppliers of oil and gas in a bid to limit their Russian energy imports. The U.S. alone will not be able to fill the current gap created by the expected shift away from Russian energy imports, but the U.S. will still boost domestic production and become an even larger global energy exporter than it currently is (the U.S. is already the world’s fourth-largest crude oil exporter and second-largest natural gas exporter). To meet growing local and international demand, the US will have to accelerate pre-existing plans to increase output, notably in the liquid natural gas (LNG) sector. Estimates by the Economist, (a British publication) is that by the end of 2022 the US will have the largest LNG export capacity in the world and will overtake Qatar and Australia in export volumes in 2023, cementing its reputation as a major energy exporter.

On a state-by-state basis, a Moody’s report finds, for example, that Michigan automakers are hit by continued shortages of computer chips, as semiconductor plants deal with cutbacks in Ukraine’s supplies of neon they need for lasers. Higher prices for palladium, used in catalytic converters and a major Russian export, also affect carmakers. In addition, high-end condominium prices in New York City and south Florida could fall as Russian oligarchs are frozen out of those markets. States with greater exposure to the financial markets, like New York and Connecticut, are under pressure as extended hostilities heighten uncertainty and put a further big dent in stock prices. Washington and South Carolina, the two states that export the most proportionally to Russia and Ukraine, would also be hurt. Shipments affected likely would include transportation equipment from Washington and auto parts from South Carolina.

In sum, the Russian invasion of Ukraine represents a negative supply shock to the nation’s economy, an event that interrupts production and raises prices. Assuming the conflict doesn’t spread outside Ukraine, the supply shock likely won’t be enough by itself to derail the U.S. economy, which expanded in 2021 even as oil prices rose sharply without any assistance from Russia. The complicating factor, and main danger, according to an analysis from the New Yorker Magazine is that the Ukraine supply shock comes on top of a global supply shock leftover from the coronavirus pandemic, which shuttered factories, snarled international supply chains and raised the price of everything. This number of adverse events has prompted comparisons to the1970s, when an oil-price shock combined with domestic price pressures led to stagflation and eventually a recession.

In the longer term, the economic scars for the U.S. and the rest of the globe will depend on the direction of the war. The conflict may alter the global economic and geopolitical order, leading to a new era of de-globalization as trade, energy and supply chains reconfigure or decouple, payment and financial networks fragment, reserve currency holdings shift, capital flight problems emerge and defense alliances reshuffle. The extent of the impact will also depend on how long elevated price pressures last and on how policymakers respond to anchor long-run inflation expectations.

About the author: Michael J. Paton is a portfolio manager at Tocqueville Asset Management L.P. He joined Tocqueville in 2004. He manages balanced portfolios and is a member of the fixed-income team. He can be reached at (212) 698-0800 or by email at [email protected]

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