By: Dr. M. Ray Perryman
Published in syndication March 02, 2022
Russia's invasion of Ukraine is ongoing, and it is impossible to know at this point how it will play out in terms of duration or magnitude. While any such aggression causing loss of life and freedom is first and foremost a humanitarian tragedy, it also brings economic fallout.
The reaction in financial markets was predictably swift. Stocks fell due to rising uncertainty, which typically results in business decisions being deferred. As is common, some of the initial declines were recovered as traders weighed the situation, but there continues to be volatility in response to developments in Ukraine, a pattern that will undoubtedly persist.
Oil prices rose sharply. Russia is the second largest supplier, and disruptions are now quite possible. Supplies were already tight, and the conflict adds a new layer of concern. There was some backing off from the initial spike, but an ongoing risk premium is clearly in place.
Demand for US treasury securities intensified, pushing up prices and driving down yields. US debt remains the global standard for investments that are politically risk free and is the most secure haven in any crisis. It happened after 9/11, during the mortgage crisis, as the pandemic began, and now with this calamity. While we may pontificate about cryptocurrency, global currency, or other means of exchange (and such instruments will indeed expand), the preferred medium will remain US dollars for the foreseeable future.
A variety of sanctions have been implemented by the US and other western nations. The goal is, of course, to stifle the Russian economy and collapse the ruble, thus limiting the capacity to wage war in multiple ways. As a practical matter, such sanctions, while potentially effective, will inevitably ripple across the global economy. The world is highly integrated, and there is no way to isolate the effects to a single area.
Another outcome is to reaffirm the absolutely essential nature of energy security and US oil and gas production. With much of northern Europe heated by Russian natural gas, geopolitical risks are intensified because of this dependency (and purchasing Russian gas provides cash to fund the hostilities). More robust capacity to deliver Texas liquefied natural gas to Europe would alleviate (or even eliminate) this situation. Renewables are clearly an indispensable resource for meeting long-term climate goals, but cannot carry the entire load.
There will inevitably be ups and downs as the conflict persists, but until it is resolved, we will see fallout for the US economy. In particular, it throws a major wrench into the progress in easing supply chain issues and dealing with inflation. Much depends on what happens next, but it is already obvious that the consequences will be significant. Stay safe!