Economic Consequences of the Ukraine War

Russia's invasion of Ukraine was swift and dramatic, but the global economic consequences would be much slower and less spectacular. However, apart from Ukraine, Russia is likely to be the biggest long-term economic loser from the conflict. Russia's invasion of Ukraine was swift and dramatic, but the economic consequences would be much slower and less spectacular. The war itself was tragic, first and foremost for the Ukrainian people, but also for the Russian people and the global order more generally. When something like this happens, we hope it's like a morality game where all the bad consequences play out dramatically in every dimension, including the economy. But the economy doesn't work like that. True, financial markets reacted quickly to news of the Russian invasion. The MSCI All Country World Index, the leading global equity gauge, fell to its lowest level in almost a year. Oil prices rose above $100 a barrel, while European natural gas prices initially jumped nearly 70%. The increase in energy prices will have a negative impact on the global economy. Europe is particularly vulnerable, because in recent years not much has been done to reduce its dependence on Russian gas, and in some cases – notably, Germany, which is abandoning nuclear power – has even made it worse. Oil-importing countries will experience a drag from higher prices. The United States is better protected: Because its oil production equals its oil consumption, the more expensive oil is roughly neutral for GDP. But higher oil prices will hurt US consumers while helping the more constrained segments of business and workers linked to the oil and gas industry. The price spike will also add to inflation, which is already at a generation high in the US, Europe and other developed economies. But some perspective on this immediate consequence is in order. At $100 per barrel, oil is about a quarter below its inflation-adjusted price for 2011 to 2014. Additionally, oil futures prices are lower than spot prices, indicating that the market expects these gains to be temporary. Hence, the central bank may largely see through events in Ukraine, neither delaying tightening nor accelerating it in response to higher headline inflation. And global stock markets have been on the rise over the past year.

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