President Joe Biden has slapped a set of economic sanctions on Russia for its aggression against the nation and people of the Ukraine that will no doubt cause considerable pain to Putin and his cronies. But Biden notably did not impose the one set of sanctions that would have had a real damaging impact on the Putin regime. In fact, the US continues to import oil from Russia even as the war continues. A barrel of oil has risen to $107 and the price of fuel at the pump is now more than $4.00 in most cases. What that means for us as consumers is that we will most likely continue to pay higher prices for many consumer goods that depend on the price of fuel.
While our eyes are on the Jewish community in the Ukraine as they face the relentless Russian assault, we are also witnessing the disintegration of a country and its economy. The Ukraine produces 18% of the world’s sunflower seed, safflower, or cottonseed oil exports; 13% of corn production; 12% of global barley exports; and 8% of wheat and meslin. In absolute figures, corn is the largest Ukrainian export market and brings in a massive $4.77 billion every year. If all of this is choked off, it is fair to say, the supply of corn will be severely impacted and what corn there is, will be available at a much higher price.
As for Russia, their big export to the U.S. is mineral fuels, estimated at $13 billion. Following that, the USTR lists precious metal and stone ($2.2 billion), iron and steel ($1.4 billion), fertilizers ($963 million) and inorganic chemicals ($763 million). If the Western world tightens the noose around Russia by imposing sanctions on some of these key exports, the Russian economy may be on the verge of collapse.
We only need to go back a few years to see how sanctions can potentially make a difference. Following the annexation of Crimea in March 2014 and Russia’s involvement in the ongoing War in Donbass, the United States, the European Union, Canada and Japan imposed sanctions on Russia. This directly led to the decline of the Russian ruble and sparked fears of a Russian financial crisis. Russia responded with sanctions against a number of countries, including a one-year period of total ban on food imports from the European Union and the United States. Quite interestingly, the impact was minor for the West and significant for Russia. Not all sanctions accomplish what they set out to do.
According to the Russian economic ministry in July 2014, GDP growth in the first half of 2014 was 1%. The ministry projected growth of 0.5% for 2014. The Russian economy grew by a better than expected 0.6% in 2014. As a result, the Russian economy risked going into recession from early 2014, mainly due to falling oil prices, sanctions, and the subsequent capital flight. While in 2014 GDP growth remained positive at 0.6%, in 2015 the Russian economy shrunk by 3.7% and was expected to shrink further in 2016. By 2016, the Russian economy rebounded with 0.3% GDP growth and officially exited recession. The growth continued in 2017, with an increase of 1.5%.It isn’t as if these
What we learned from all this is that the Russian gamble in Ukraine was much more than political where Russia was seeking a reset in the alignment of nations. It amounted to the popular saying of “they shot themselves in the foot.” You just don’t rebound so quickly from devastating sanctions and who suffers the most, your own people. And there is so much that is unknown, a possible recession, a refugee crisis, and worse a new political and economic order that does not necessarily leave Russia standing.
Economists are warning that the Baltic war, as some are calling the Ukraine War, will have a residual effect on our economy. The international monetary system may be shaken. What is most certain is that fuel prices will continue to soar. That automatically leads to higher shipping costs and spiking consumer prices for a wide range of goods. We already saw what instability can do to shipping. Just revisit the hundreds of freight ships that are standing idly in many ports waiting to be unloaded and the ongoing supply chain crisis.
One international economist said on a national broadcast that while the US economy is relatively strong, a prolonged war could be devastating even here. He went on to list some of the possible casualties including international travel, a halt to the expansion of multinational companies, a shaky stock market, and the possible collapse of the global economy in general. He hedged a bit when it came to an international financial crisis but had this to say: “At the moment Putin holds all the cards, and perhaps eventually the Russian generals if they decide that they have had enough of Putin adventurism. But so much is unknown about where the Russian fiasco is headed that it is impossible to predict.”
The economist may be right. If Putin’s appetite goes beyond Ukraine and even includes NATO countries, there will be all kinds of repercussions globally. The Western world is likely to slap more sanctions and the effect on fuel prices may hit home.
For now, most Americans are focused on the human disaster in the Ukraine. The images of mothers holding crying babies as they flee from terror are captivating ordinary Americans. But even isolationist America in World War II took notice when the war found itself into the pocketbooks of ordinary Americans. True that there was a war effort underway, but we should never underestimate how things can spiral out of control.
Wars are destabilizers. Things rarely go back to where they were. Imagine if Russia carpet bombs the Ukraine and then is forced to rebuild the infrastructure without the world as much as lifting a finger. That in itself can spell economic ruin for Russia, even if Russia is able to somehow hijack Ukraine’s natural resources. And then there is the challenge of winning over the hearts and minds of the vanquished, not at all an easy task in the Ukraine where the population has shown resilience beyond anyone’s expectations.
As for us, we are already mired in record inflation, a supply chain crisis, and lingering COVID repercussions. Let us hope that the latest war does not compound our problems.