Ukraine Crisis Overshadows Everything
Within the span of just a few days, Russia’s invasion of Ukraine has overshadowed virtually all other news. As this is a highly fluid situation, it is difficult to create analyses that may not be outdated within days, if not hours. However, I am going to try to point out some likely economic impacts.
In economics, a black swan event is defined as an unpredictable event that is beyond what is normally expected of a situation and has potentially severe consequences. Certainly, there are some potentially severe consequences at stake in this case. But I am not sure you could call this an unpredictable event. Russia first invaded Ukraine in 2014, when it annexed Crimea and has been saber rattling in the region before and since that event.
One thing that is critical to note is that the global sanctions that were imposed on Russia in 2014 had a significant impact. In the year prior to those sanctions (2013) Russian economic output was at just under $2.3 trillion. By 2015, it had fallen to approximately $1.4 trillion. As of 2021, those numbers had rebounded slightly to $1.6 trillion, but this places Russia as 11th in the world for economic output. To put things in perspective, the United States’ GDP during the same time was just under $23 trillion. In fact, the state of California’s GDP was roughly $3.4 trillion—more than double that of Russia’s.
The potential impact of the current wave of sanctions will have an impact. They are far more widespread and potentially disruptive than the measures enacted in 2014. These include shutting the government and banks out of global financial markets, freezing the assets of Russia’s oligarchs and restricting technology imports. Enough so that reports have already emerged of Russian billionaires calling for peace—a type of public criticism of policy that simply has not happened within Russia’s ruling elite under Putin.
Whether they are enough to spur a backlash that would force Putin to change course is another story. Except for Germany’s decision to halt the Nord Stream 2 pipeline, the sanctions have avoided choking off the export of Russian fuel. The European Union received more than 25% of its oil from Russia and about 40% of its natural gas. The energy sector drives more than a third of Russia’s national budget, but sanctions here would be deeply damaging to both sides. Regardless, the price of Brent Crude shot up above the $100 mark late last week (first time since 2014) and Goldman Sachs analysts say that only demand destruction will keep this price from hitting $115 per barrel within the next month.
This means that even without energy sanctions in place, gas is about to get a lot more expensive. If sanctions were expanded to include oil or were the Russians to retaliate to current sanctions by cutting off Europe (though it would hurt them more than the E.U.), there is an outside potential for a 1970s style fuel crisis, with Europe facing the worst of it. But pricing would be impacted everywhere as the E.U. would seek out alternate sourcing.
Likewise, food costs are going to creep up. Russia is the world’s largest exporter of wheat (the Middle East is its biggest consumer), while Ukraine is the world’s fifth largest exporter. Together, they account for roughly 25% of the world’s wheat. While the U.S., Canada, and France (numbers 2, 3 and 4) are likely to pick up some of this slack, the price of bread, pasta and other wheat-based goods is already climbing (futures were up over 5% in weekend trading and this is likely just the beginning).
Of course, there are countless different scenarios that could play out over the next few hours, days and weeks that could change the trajectory of this crisis. But the rise in energy and food pricing are already givens and beginning to happen. Unfortunately, there is probably one other given already in the mix and that is a humanitarian crisis.
Most military analysts see little to no chance of the Ukrainian military being able to defeat Russian forces in a conventional war. That said, current US intelligence reports from the region indicate that the fierceness of Ukrainian resistance has taken Putin’s military by surprise and slowed their progress. Regardless, the likely question here is whether those forces can hold out days or weeks. But if Putin’s plan had been to topple the democratically elected Zelensky government and replace it with a puppet government, it is increasingly looking like the Kremlin may have grossly miscalculated. From breweries that have ditched making beer for Molotov cocktails to reports of the Ukrainian government distributing guns to its citizens, the makings of a major and prolonged insurgency are in place.
There are some excellent analyses of what that could mean. A Ukrainian insurgency could drain Russia’s resources and will, writes Tom Mockaitis in The Hill. In his article, The Coming Ukrainian Insurgency, published in Foreign Affairs on 2/25, Douglas London in Foreign Affairs argues, “many a great power has waged war against a weaker one, only to get bogged down as a result of its failure to have a well-considered end game. This lack of foresight has been especially palpable in troubled occupations. It was one thing for the United States to invade Vietnam in 1965, Afghanistan in 2001, and Iraq in 2003; likewise for the Soviet Union to enter Afghanistan in 1979. It was an altogether more difficult task to persevere in those countries in the face of stubborn insurgencies.”
Meanwhile, in his Forbes article “Think Twice About a Ukrainian Insurgency,” contributor Mark Cancian writes that commentators should restrain their enthusiasm for the notion of this as an alternative path to repelling the Russians. He lists seven reasons for caution, including the fact that insurgencies take a long time and history tends to record the successful ones because they are the outliers. Regardless, all these analyses ultimately agree that a Ukrainian insurgency would be an extended, bloody conflict with civilians bearing the brunt of the punishment.
As of the morning of 2/28/22, it was reported that over 500,000 Ukrainians had fled their country in what will surely become a major humanitarian crisis. With a population of roughly 42 million people, it is entirely within the realm of possibility that Europe may be dealing with two million or more refugees just within the next week or two. Keep in mind that before the Syrian Civil War began, that nation’s population was 22 million. More than six million were internally displaced and another five million refugees fled the country. Let’s hope that events transpire so that the Ukrainian people are spared that level of suffering.
See you next week.