Quick take – Russia invasion a modest negative for U.S. economic growth

Economic Commentary

February 24, 2022

What happened

Russia launched a military invasion into eastern Ukraine. A flight to safety pushed U.S. stock prices and bond yields sharply lower, while the U.S. dollar jumped to its highest level since July 2020, particularly against the euro. 

Additionally, global energy prices surged in expectation of disrupted Russian energy exports and Ukrainian natural gas exports. U.S. crude oil crossed above $100 per barrel (West Texas Intermediate) for the first time since mid-2014, up about $10, or 11%, in the past 10 days. U.S. natural gas prices (Henry Hub) have increased more than 20% over the same span. 

This week, in response to the Russian military actions, Germany stopped the certification process for the Nord Stream 2 pipeline, which would carry natural gas from Russia directly into Europe via Germany. European natural gas spiked more than 40% in several countries, including the Netherlands, Germany, and the United Kingdom (U.K.).

Western leaders — primarily the U.S., Europe, and the U.K. — are formulating sanctions against Russia. The most likely sanctions will be financial and export controls, but probably would exclude energy exports, which would cripple European economies.

The U.S. is likely to release some supply from the Strategic Petroleum Reserve (SPR), which would be mostly symbolic for the crude oil markets and unlikely to have a large impact on U.S. gasoline prices.

Our take

This move into Ukraine has been long planned and calculated by Russia, which will not be dissuaded by the current Western sanctions, making them ineffective. Now that military action has started, the maneuvering room for a possible diplomatic solution is very limited. Frankly, Russia now holds most of the cards, such as knowing that cutting off Russian energy exports hurts Europe economically more than itself. On the other hand, the notion that Russia would voluntarily slow or cut off energy exports to Europe is equally doubtful.

The biggest impact to the U.S. economy is that it aggravates inflationary pressures as supply chains are disrupted, even those not directly connected (for example, over-ordering and hording by companies). Moreover, Ukraine is a leading exporter of agricultural and key industrial commodities. For instance, Ukraine is the world’s second largest exporter of barley, third largest of iron, eighth largest of wheat, and tenth largest of steel.

Global energy markets are pricing in prolonged disruptions. Ukraine is the 4th largest natural gas exporter, while Russia is among the largest crude oil exporters at over 7.5 million barrels per day. The direct impact of energy is significantly higher on Europe than on the U.S. and could push some European nations into recession. That would cool U.S. exports marginally and complicate European-based supply chains due to factors such as hampered production.

Conversely, if the Russian military action is prolonged in terms of weeks or months, it has the potential to restrain the extreme level of job-hopping seen by U.S. workers (i.e., preferring job stability in an uncertain time), thus easing some of the recent wage inflation. But that would take a while. 

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