Russia’s invasion of Ukraine is already introducing more uncertainty into a global economy sick of an uncertain future.
Indeed, stock markets around the world tanked after Russian President Vladimir Putin invaded Ukraine, underscoring rising concerns that a prolonged war will wreak havoc on the economic system. For instance, shares in tech giantsApple and Microsoft dropped on news of the war, a bad sign considering that those titans are generally considered to be bellwether companies.
Still, it’s unlikely the world economy will stoop to the sudden, shocking lows from the onset of the COVID-19 pandemic, when investors panicked over the sudden halting of global supply chains and a deadly virus for which the populace, at the time, lacked preventive vaccines.
But there are three major ways that the worst military crisis in Europe since World War II is negatively impacting the world economy already.
1. The energy markets are messed up
Through Gazprom, its state-owned energy giant, Russia is a major provider of natural gas to Europe. It delivers gas via a huge pipeline that runs through Ukraine.
In a surreal turn of events, Western European nations paid Russia for gas being piped from Russia through Ukraine, even as Russian tanks entered Ukrainian territory and fighting broke out. Investors immediately concluded this wouldn’t stay the case for long.
Russia’s war against Ukraine immediately caused the price of oil to soar 9%, to over $105. Meanwhile, European natural gas futures soared 50%, which analysts attribute to concerns over future Gazprom exports.
The ramifications could be global. The high price of oil, for instance, could lead to high gas prices for car owners in the U.S., something President Joe Biden acknowledged during a media briefing on Thursday.
“We’re taking active steps to bring down the cost, and American oil and gas companies should not—should not—exploit this moment to hike their respect prices to raise profits,” Biden said. At the same time, he denied that excessively high gas prices would last very long, and said a spike in certain commodities was natural after a nuclear power invaded a major country, with over 40 million residents.
2. Inflation is set to go even higher
Inflation has surprised economists—and the Biden administration—by climbing to heights unseen since the early 1980s, as COVID vaccines unleashed waves of economic spending that supply-chain snarls haven’t been able to keep up with.
At the same time, critics have said that the Biden White House simply created too much money too soon and that it will take time to get sucked out of the system. As Fortune’s Shawn Tully reported, the monetarist theory of inflation pioneered by Milton Friedman is having its day again, with the U.S. economy looking like a bathtub overflowing with water, if only water took the shape of too many new dollars.
A massive land war in Ukraine, however brief, is sure to disrupt the supply chain even further, though.
The war could kick-start an inflation peak “at higher levels than we were envisaging just a few days ago,” Oxford Economics director of global macro research Ben May told CNN.
This means that prices for oil, gas, food, and raw materials could go even higher than they already were. And if prices boom amid growing fears of an unpredictable war, consumers may be holding on to their cash instead of spending it, thus hurting the economy.
3. The invasion marks yet more uncertainty for markets after a big correction in January
The markets don’t love uncertainty.
In January, U.S. equity markets experienced a major correction, driven in part by rising inflation and investors attempting to reevaluate how companies were being impacted by the COVID-19 pandemic’s lingering effects on the economy. This was the month that businesses like Netflix and Peloton got slammed on Wall Street after they revealed slowing growth as part of their earnings.
Now, Russia’s invasion of Ukraine has thrown another major wrench into the marketplace. As Fortune’s Chris Morris reported, “All major U.S. indexes plunged at the market’s open, and the Nasdaq index, which has been volatile for some time now, flirted with bear market territory.”
Not all uncertainty is bad for markets, on the other hand. In a wild swing on Thursday, stocks erased a massive drop at the open. The Dow was down over 850 points earlier in the day, and the Nasdaq was down almost 3.5%, but rallies undid much of that through the day. The S&P 500 actually finished 1.5% higher. Bloomberg data shows the Nasdaq’s climb of 886 points between open and close was a massive 7% jump, the largest in records dating back to 1971.
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