As the world recoils in dismay and disgust at Russian aggression and mourns the appalling suffering of the Ukrainian people, many Americans are just beginning to grasp the economic impact of this violence.
After the devastation of two world wars in the first half of the 20th century, most of humanity embraced peace. We have learned the priceless lesson that human well-being is far more enhanced by the positive-sum practice of engaging in peaceful and mutually beneficial trade with foreign populations than by the primitive zero-sum practice of war that destroys valuable assets—property, yes, but especially human life. Perhaps the French and Germans should be the poster child for peace. Generations of French and Germans fought each other in two world wars and several skirmishes in the 19th century. Now, having seen the light of day, they share open borders, a common currency, and enjoy the blessings of peace and prosperity together.
Unfortunately for Ukrainians and the rest of the world, Vladimir Putin and his henchmen didn’t learn that lesson. I include “the rest of the world” because people around the world will feel economic pain from the Russian invasion.
Today’s world is more interconnected than at any time in history. Over the past seven decades or more, a global division of labor has evolved, leading to specialization and increases in efficiency that have created unprecedented wealth and raised the living standards of billions of people. The downside of such extensive economic interdependence is that a war that appears to be between only two countries can create disruptions in global trade and commerce networks that cause chain reactions of economic disruption in many other countries.
Here is just a sample of the global economic impact that can be expected from the Russian attack on Ukraine:
Ukraine produces almost half of the world’s neon. (I’ve read 40%, 50%, and 70%. Whatever number is closest to the truth, it’s a lot.) Today, neon isn’t used in electric light signs as much as it was in the 1950s; Rather, it is a crucial element used in the manufacture of semiconductor chips. In 2021 we saw some shortages in cars because we didn’t have enough computer chips. As the world suddenly loses half its neon supplies, we will see supply chain collapses for cars and other modern gadgets that will dwarf what we have seen so far.
Food prices will go up, maybe a lot. Together, Russia and Ukraine account for about 30% of world wheat exports – 12% of which comes from Ukraine, historically known as “the breadbasket of Europe”. How much wheat will be grown in Ukraine this spring when the whole country is under siege? Definitely a lot less than normal. And who knows how the Russian wheat harvest will be affected, especially by sanctions. Wheat prices (which are traded “limit up” almost daily in the US futures markets) are skyrocketing. Other food prices will also rise as demand that was previously satisfied by buying wheat will be redirected to demand for other grains. Pity the poor people of the world who will have a harder time affording the food they need.
Energy prices have already risen sharply and will likely continue to do so. Russia’s exports account for 8% of world supply. If sanctions and import bans prevent this oil from reaching world markets, who knows how high the price of oil will go? Russia is also a major natural gas producer, so gas prices are expected to rise much more. And because natural gas is used in the manufacture of fertilizer, already rising fertilizer prices could rise much higher, putting additional upward pressure on food prices.
The biggest economic threat from the Russian invasion of Ukraine may come from the financial markets. Again, think about how interconnected the global economy has become. Last week, nickel prices on the London Metal Exchange skyrocketed 82% in just one day on uncertainties surrounding nickel supplies as Russia is a key nickel supplier. As a result, a unit of China Construction Bank Corp., one of China’s four largest banks, which had shorted nickel futures received hundreds of millions of dollars in margin from the LME. They couldn’t pay for it. Such a default could affect numerous counterparties (think of the tangled web of derivatives that began to unravel in the 2007-08 financial crisis), so the LME granted them an extension. As of this writing, there is no way of knowing how it will play out, but we must recognize that the world’s financial system – stretched as ever by using too much leverage – could begin to implode as a result of defaults. Would the Federal Reserve and other central banks be able to stop such a panic? Could they do so without adding fuel to the inflationary fire? Suffice it to say that the global financial system is in a precarious position.
We can only hope and pray that a peaceful solution will be found quickly in Ukraine, not only for the primary humanitarian reason of saving thousands if not millions of lives, but also to prevent immense collateral economic damage, including a possible global one economic collapse.
Mark Hendrickson is a retired Associate Faculty Member, Economist, and Fellow in Economic and Social Policy at the Institute for Faith and Freedom at Grove City College.
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