As far as recent wars have gone, Russia's invasion on Ukraine has already become uniquely impactful on the global economy. Sanctions on Russia and Belarus are more severe than any similar economic actions in recent history.
A lot of things have started to change already, and the effects will be felt to some extent around the world. Right now, the largest impacts being felt are in a few key areas:
Sanctions are working quite effectively, and Russian and Belarusian citizens will be hit the hardest by them overall. But make no mistake, these events will affect your bottom line for some time as well.
Leaders of Western governments have intended to weaken the economies of Russia and Belarus as an economic and diplomatic response to their military aggression.
However, the same leaders are also readily aware that such actions will harm their own economies, to varying extents. US President Joe Biden announced new sanctions at the end of February 2022. At the same time, he warned Americans that there will be some economic pain felt at home.
Explanations of the war itself, or even of long-term geo-economic shifts that will stem from this war are beyond the scope of this article. Also, many of you reading this have likely not lived through a global event like this.
So, as always, we will simply take a look at how these developments will affect the daily financial lives of our readers:
On Saturday, March 5th, the International Monetary Fund (IMF) put out a warning. The organization warned that the invasion of Ukraine will have a “severe impact” on the global economy. Specifically, they stated that:
The most significant economic response to Russia’s invasion is certainly the country’s removal from SWIFT. With Russian banks unable to access SWIFT, Russia’s key trading partners will have difficulty purchasing the oil and natural gas they’ve come to rely on.
If you live in Europe, the effects will be more severe and immediate. But there will continue to be effects on the global oil and gas industries as a result.
The IMF statement above also mentioned recent trends. The sanctions and their effects on energy prices come amidst a recent history of high inflation. Energy prices had been rising during the months prior to the invasion. As of Friday, March 4th, 2022, oil prices almost reached $120 per barrel.
How long these trends continue rests on how the invasion of Ukraine plays out. In the worst case:
In the (relatively speaking) best case:
War is inherently unpredictable. Russian energy suppliers have not been directly targeted by sanctions so far. However, even the course of the war provides no guarantee of no disruptions to oil and gas supplies.
We’ve gone over the industries that Covid already hammered, which are being hammered hard for a second time:
Prior to the invasion of Ukraine, the IMF was projecting 4.9% growth in the global economy for 2022. Now, the greatest threat to growth worldwide is the squeezing of the average consumer.
Households will continue spending ever-larger portions of their income on gas, heating, and to some extent other basic goods and services. This, combined with plunging markets, likely means:
Wartime is often a time for caution in the stock markets. As is typical, investors worldwide are more cautious, if not pessimistic, than usual.
The S&P 500 has been faring remarkably well during the last few years, considering the circumstances. As of January 2022, the index had more than doubled from its mid-Covid low in March 2020. The news from Europe, however, has sent it downwards again.
During times like these, investors are cautious, particularly about commodities and companies involved in them. In some cases, many people flock to “safe haven” investments, such as gold or the Japanese Yen.
Most recently, amid the failed peace talks between Russia and Ukraine, gold has steadied at about $2,000 after surging from safe-haven buying.
As is the case with much of the news so far, war is a time of uncertainty and pessimism. These trends will shift as the state of the war develops. On the one hand, it’s a bad time to rest on cash with already-high inflation being aggravated.
But it’s also not a time for risky investments. Overall, the safer option is large-cap stocks in companies that are highly profitable, growing healthily, and not overly leveraged.
While the safe option now is the safe option always, it’s more prudent to value such safety during an economically uncertain time like this.
War is defined by chaos, pain, and unpredictability. No one is suffering more than the people stuck in a warzone who are uncertain about their future, or even the prospect of remaining alive for another day. But this is a uniquely economically impactful war, as far as recent wars go.
Some level of uncertainty and economic strain will be felt at all corners of the globe. Government leaders and the big international financial institutions are more certain of that than they are of the long-term outcome of Russia’s invasion on Ukraine.
While a lot is left to be determined, there are a few things you can expect for some length of time before the dust settles:
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