How Russia's Invasion of Ukraine Is Affecting the Economy

I commute to work. When leaving my house and heading out of the Madison suburb of McFarland on Highway 51, I pass by the Kwik Trip across the street from my house. There were a few days in a row where I would leave for work a little before 7:30 AM and the gas price would be 10 to 15 cents higher when I passed by it on my commute home around 5:30 PM. When did these days occur? I can’t recall exact dates, but they were in the aftermath of Russia’s invasion of Ukraine. As I start writing this the evening of Friday, March 25th, it is $3.89 per gallon of unleaded gas. Before the invasion of Ukraine, to the best of my memory, it was about $3.14.


The first impact of Russia’s invasion of Ukraine (hereafter, “the invasion”) to discuss involves the stock market. The S&P 500, a major stock market index tracking 500 large companies, ended at $4225.50 on February 23rd, the day before the invasion. On March 1st, after the invasion, it ended at $4,306.26. On March 25th it ended at $4,543.04. Despite the crisis, the stock market has not experienced the crash it did at the beginning of the COVID pandemic. On March 16th, 2020, alone the S&P 500 dropped 11.98%. The market always recoups its gains, though. It’s just a matter of time. From March 1st to October 1st of 2020 the S&P 500 grew 14.44% (1). In the long-term, the stock market is just fine. The overall stock market ultimately grows based on the health of the US economy, though short-term disruptions can throw a wrench in it.


Oftentimes, “animal spirits” affect the economy because what people expect to happen is what ends up happening. John Maynard Keynes, the British economist known for Keynesian economics coined this phrase to describe “a spontaneous urge to action rather than inaction” (​​2) not because of mathematics and facts but due to human psychology. As I write this, the consumer confidence index and business confidence index (perhaps the best indicators we have of “animal spirits”) have not come out for March 2022, but the consumer confidence index dropped from 98.88 for January 2022 to 98.55 for February 2022 according to the Organization for Economic Co-operation and Development (3). The business confidence index did not change between those two months, and it remained at 101.9 (4). The long-term average for both indices is 100.


So, we are not in a major crisis of the overall health of the economy due to the invasion, but there are effects on commodity prices. The price of a barrel of crude oil at the end of February 23rd was $96.84. It dipped slightly on the 25th (from the 24th’s prices) but rose up to $112.93 by the end of March 2nd (5). Currently, the US and the UK have banned imports of Russian oil, although only about 8% of US oil imports came from Russia before the invasion (6). Banning imports of Russian oil would be far more difficult for the European Union, as they are far more dependent on Russian oil. About 34.1% of Germany’s crude oil came from Russia in 2021, for example (7). Per the normal laws of supply and demand, the price will go up when supply decreases. The energy index of the Consumer Price Index (a popular measure of inflation) rose 3.5% in February 2022, and 6.6% for gasoline specifically (8). In January 2022 the gasoline index fell by 0.8%. Ahh, the fancy explanation for what you see at your local gas station.


The invasion has also left a major impact on the commodity of wheat. Wheat prices on February 23rd, 2022 closed at $287.00 per ton (9). On March 7th they peaked at $395.00 per ton. Ukraine is one of the world’s largest exporters of wheat (at least it was before the invasion) and the war has not favored the export of goods. According to Ukraine’s agricultural minister, the country is only exporting a few hundred thousand tons of grain per month compared to four to five million tons of grain under normal circumstances (10). This is in part because Russia’s navy is preventing those exports from leaving the Black Sea, which is Ukraine’s main water link to the Mediterranean Sea and from there, the world’s oceans. Ninety-five percent of Ukraine’s wheat exports went through the Black Sea in 2020 (11). Additionally, on March 9th, the Ukrainian government banned exporting wheat, sugar, meat, oats, etc. from the country to try to feed their own people (12). This hits no region worse than, perhaps, the Middle East. Egypt and Turkey, for example, get about 70% of their wheat from Russia and Ukraine.


Then there’s the microchips. I don’t know much about them, but I know cars need them. And this is maybe why used cars have been appreciating lately. Usually cars don’t appreciate in value because they get less valuable the more miles are put on them. I am an avid listener of The Ramsey Show, and in an episode about a month ago, Dave remarked that he never thought he would be answering a capital gains question about a car. This is a situation in which you buy a car at, for example, $4,000 and sell it for even more. That is a capital gain. So, less microchips means fewer cars, and fewer cars means higher car prices. Russia and Ukraine are key suppliers of neon, palladium, and platinum, which are important materials in manufacturing microchips. In fact, 60% of the neon that comes from Russia is purified in Odesa, a major Ukrainian port city on the Black Sea (13). There was already a shortage of chips well before the invasion due to COVID-19 lockdowns, but war in Russia and Ukraine will not make it better.


Inflation is something that’s happening, and ideally it would be at about 2% annually. It’s part of the Federal Reserve’s job to get it there (14). On March 16th, the Fed (Federal Reserve) voted to raise interest rates by 0.25% (15). This is intended to lower inflation by making it more costly to borrow money. How does this work? The Fed controls the Federal Funds rate, which is the interest rate for banks making overnight loans to each other so they can lend money to consumers (Dave Ramsey does not like borrowing money). With this action being more expensive, the costs of borrowing money are then passed on to consumers. Perhaps the standard mortgage rate goes up from 4% to 6%. I would rather get a mortgage at the former than at the latter. So, less borrowing money means less demand for stuff, which means lower prices — theoretically. That would result in disinflation, which will probably not happen, but at least inflation would decrease. The forecasted Federal funds rate has increased as inflation has reared its ugly head lately (16) and the consumer price index just keeps increasing (17). About a 2% rate of inflation would be healthy for the economy, but too much is not good.


We have a lot to be thankful for in the United States right now. We don’t live in an active war zone, we aren’t restricted to getting gas on certain days (which happened during stagflation in the 1970’s), and we have enough leisure time to make March Madness brackets. It’s an unusual time in the world, but if you are invested in stocks— keep at it, unless you want to pay off debt or otherwise need the money for an emergency. If food prices are too much for you, maybe eat less. If gas prices are too much for you, move closer to work or church if you want to (although that costs money and most people don’t have a lease that ends tomorrow). And take care of your car so you don’t need to buy another one. If it were during the winter (and maybe it is for you), I’d tell you to get a car wash every other week so your muffler doesn’t rust out. Either way, I think we can weather this crisis, and we should pray for world leaders conducting diplomacy to help bring this imperialistic invasion to an end. If you want to help Ukraine there are many ways to do so. One I recommend is making a donation to the American Bible Society at americanbible.org. According to an alert on their website, Ukrainian bibles and aid are needed. Nothing is certain but death and taxes, as the saying goes. Perhaps we could add on inflation.

 

Curran Martin is a Minnetonka, Minnesota native and currently resides in Madison, Wisconsin. He graduated from the University of Wisconsin-Madison in May of 2019 with a degree in Economics, then spent two years working with a campus ministry, and now works in the insurance industry. Curran enjoys playing outdoor sports, learning about history and politics, and playing board games with friends in his spare time.