Dr. Robin Dhakal
The recent conflict in Eastern Europe between Russia and Ukraine has
tested many international norms, institutions, and systems. The strengths and
relevance of international alliances, such as the United Nations (UN) and the
North Atlantic Treaty Organization (NATO), have been directly challenged by
this conflict. Even though the West has been reluctant to make this conflict a direct
conflict between Russia and NATO, many countries have applied crippling
economic sanctions against Russian oligarchs, government officials, and the Russian
economy at large. Most recently, the Biden-Harris administration announced that
the U.S. will stop importing oil from Russia. With these unprecedented
international economic pressures on Russia, an obvious question arises- what
will be the impact on the U.S. and the global economy?
While any war is undesirable, from the global economic
perspective, the timing of this conflict couldn’t be worse. We just went
through the worst pandemic in recent history and our economy has been
recovering from a pandemic-induced recession followed by a high level of
unemployment. While the U.S. is not in a direct conflict with Russia, we should
expect the Ukraine-Russia conflict to impact the U.S. economy and to influence
its monetary and fiscal policies.
It is helpful to know a few key statistics prior to a discussion
about the economic impact of this conflict. First, the Russian Federation has a
gross domestic product (GDP) of about $4.32 trillion (PPP, 2021 estimates), which
is just 1.3% of the global economy, according to the World Bank. However, Russia’s
exports make up one quarter of its GDP. There is thus reason to believe that
the targeted economic sanctions imposed by the West could have a significant
impact on the Russian economy. In 2021, the U.S. imported $30.76 billion worth
of goods from Russia, according to the UN Comtrade Database. Oil and oil
refinery products amount to sixty percent of U.S. imports from Russia. Hence,
the recent announcement that the U.S. is banning imports of Russian oil will
surely impact the Russian economy. However, despite the sanctions from the West,
Russia’s economy is not likely to collapse thanks to its largest trading
partner- China. In 2020, Russia’s exports to China amounted to $50 billion, of
which 15% were oil and gas (an amount that is expected to grow during and
following the Ukraine conflict). It is also important to note that two of the
largest trading partners for China are the U.S. and the European Union.
Therefore, it seems unlikely that China would jeopardize its own economy in
order to help Russia by exclusively aligning itself with Russia.
So, what does all of this mean for the U.S. economy?
Most of the impact that this conflict will have on the U.S. and
global economy will be seen in subsequent supply chain disruptions. The
sanctions and economic restrictions placed on Russia mean that we are creating
a virtual wall around Russia. Companies are now unable to use Russian airspace
or Russian ports to transport goods. This means that it costs companies more money
to transport their goods over longer air and sea routes. This is especially true
when it comes to the flow of goods between China and Europe. Most of the
Russian ports are closed to cargo ships which means companies must find alternative
shipping routes. Because of this, since the start of the conflict, other ports
around the world, including the seaports in California, have seen increased
traffic. In addition, because Chinese warehouses and ports are still not functioning
at full capacity because of COVID and its new wave of infections, the supply
chain has been further disrupted. Furthermore, the rising oil and fuel prices
have made the transportation of goods even more expensive. All of this is bad
news for the world, especially since the global economy grew 2.5 times larger
over the past 30 years because of ocean transportation, according to a report
by the World Bank.
Perhaps the sector hardest hit by the supply chain disruption is
the auto industry. Many auto manufacturers have stopped production in Russia.
For example, Nissan halted production at its factory in St. Petersburg, and
Renault suspended its operation in Moscow. In addition, auto manufacturers rely
on many auto parts from Russia and Ukraine. This means that the auto producers
are having a harder time finding chips and other parts. For example, Audi
halted production for weeks because of the shortage of parts after the start of
the invasion. Ford’s plant in Germany reported a similar disruption because of
the shortage of parts.
In addition, we are also expected to see an impact in the global
food market. Russia and Ukraine combined produce over 30% of wheat and 15% of
corn in the world. Because of the conflict and the subsequent sanctions and
supply chain disruption, most of the stores of wheat and corn are not expected
to hit the global market. Those two products are also essential ingredients in a
variety of food products we consume, such as bread, pasta, cereals, sweeteners,
etc.
All of this means that we should expect to see shortages and possibly
even higher inflation in the U.S.
There are a few economic scenarios that are worth analyzing if the
conflict does not end soon. First, the combination of higher energy prices and supply
chain disruptions means that the economy experiences a negative supply shock,
which may result in stagflation. Although there is no concrete evidence of
stagflation occurring in the U.S. economy yet, it remains a possibility if this
conflict continues. Because there are no easy solutions to stagflation, the Fed
and Congress must navigate the usage of policies carefully, such that we do not
enter a bigger recession while trying to tackle inflation.
A second scenario is even more plausible: the conflict increases
inflation and affects some specific industries, but the U.S. GDP and
unemployment are healthy. This is a relatively easier scenario for the Fed and
Congress to tackle. With appropriate policy tools, the Fed can try to decrease
the money supply to dampen the fast-economic growth in the hopes of slowing
down inflation. In fact, on March 16th, the Fed approved the first
interest rate hike in over three years. Even though this is a step in the right
direction, the Fed has to navigate these tricky waters carefully, because the
Federal Reserve Bank of Philadelphia recently released a revised estimate of
the GDP growth rate for the U.S. economy, taking it down from 2.1% to 1.8%.
In either of these scenarios, Congress can aid the Fed by passing
appropriate fiscal policy bills that are not likely to increase inflation. Slowing
down some discretionary spending like the general government, defense, and
foreign aid expenditures would lower government expenditures which will ease
inflationary pressure. In addition, reducing targeted tax credits in energy and
housing sector and reducing subsidies on fossil fuel industry could help
address inflation. However, these steps need to be taken with caution and in
conjunction with the Federal Reserve System.
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| Dr. Robin Dhakal |
“Dr. Robin Dhakal is an Assistant Professor in the Forbes
School of Business and Technology. He earned a M.A. and a Ph.D. in Economics
from University of South Florida and a B.A. in Business/Economics and
Mathematics/Computer Science from Warren Wilson College. His academic research
focuses on development economics and political economy. He has been teaching
Economics in colleges and universities for the past nine years. “
References:
GDP, PPP (current international $) - Russian Federation | Data. (n.d.). Data.Worldbank.Org.
https://data.worldbank.org/indicator/NY.GDP.MKTP.PP.CD?locations=RU
Reuters. (2022, March 1). Factbox: China-Russia trade has
surged as countries grow closer.
https://www.reuters.com/markets/europe/china-russia-trade-has-surged-countries-grow-closer-2022-03-01/
Trading Economics. (n.d.). Russia Exports to China - 2022 Data
2023 Forecast 1996–2020 Historical.
https://tradingeconomics.com/russia/exports/china
United States Trade Representative. (n.d.). Russia. https://ustr.gov/countries-regions/europe-middle-east
