How Concerned Should I Be About the Economic Impact of the Russian Invasion of Ukraine?
The recent Russian military aggression in Ukraine is certain to impact the world economy in the coming weeks and months. New economic sanctions imposed by the Biden Administration are intended to profoundly interrupt Russia’s economy, which the President acknowledges may modestly affect Americans. In a press conference this week, President Biden stated, “Defending freedom will have costs for us as well, here at home. We need to be honest about that.” Understandably, most small business owners and individuals preparing for retirement are nervous about what this may mean for them. Below, we help define what we see as immediate economic consequences of Russia’s military action and provide perspective on how to handle the uncertainty.
Most of us understand that the cost of gasoline in the United States is closely tied to oil prices worldwide. Increases in international crude prices are typically followed by a rise in what Americans pay at the pump. What some may not know is that Russia contributes roughly 10% of the world’s oil supply. Following Russia’s decision to invade Ukraine, the US and European Allies have imposed stiff sanctions, intending to paralyze Russia’s ability to trade with Western countries. Russia’s inability to provide gas to Europe and the rest of the world creates a supply shortage, which will result in oil prices continuing to rise globally.
In fact, oil prices have been steadily increasing throughout the past months due to the imminent Russian invasion of Ukraine. According to the Washington Post, crude oil prices have increased 40% from early December 2021 through early February of this year. Consequently, average US gas prices have increased by 21 cents per gallon in the past 30 days. The national average cost of a gallon of gas on February 23, 2021, was $2.65, while one year later it was $3.53. This represents an 88 cent per gallon, or 33.2%, increase in just one year.
Small business owners have likely felt the pain of these gas price increases in several ways. First, increasing fuel costs lead to increases in the cost of shipping and delivery. Second, the more money Americans spend at the pump, the less money there is for other purchases. If consumers find themselves strapped for cash due to increasing fuel costs, they may be reluctant to spend at the levels seen during the pandemic, when government stimulus payments and lower discretionary spending gave many Americans more purchasing power.
Geopolitical instability is never a welcome sign for investors or businesses. Both groups like predictability because that tends to create optimism. The current situation is likely to create both short and long-term uncertainties due to Russia’s immediate military presence in Ukraine and the fact that economic sanctions imposed by Western countries will take time to work through the financial system.
However, one positive for the markets is that the invasion of Ukraine was a predictable event. US intelligence was aware of Russia’s movements and did a good job of forecasting their moves. Therefore, it was no surprise to see the US markets open lower on February 24 only to recover and close the day higher than the February 23 close.
Looking forward, the biggest risk to markets is that the economic sanctions on Russia could create supply chain issues. Given that we already have supply chain bottlenecks in many industries, another constraint on an already strained global supply chain could create new inflationary pressures. In the short-term, that could create issues for businesses and consumers as well as cause the Federal Reserve to potentially pause planned rate increases. Longer- term, investors would be wise to continue to hold stocks because these assets have typically done well during periods of inflation.
Ultimately, we believe that the key to successful investing is to create a goals-based plan and allocate your assets based on your goals and risk tolerance. Unless a geopolitical event has a direct impact on your goals, the best advice is to monitor your portfolio and rebalance it to your target allocation if any positions move outside your tolerance range.
Recent Russian aggression has led to continued supply chain disruptions, which will have an impact across the economy and markets. Specifically, Russia and Ukraine are leading global suppliers of metals such as nickel, copper, and iron. Military and political violence in the region, coupled with US and European sanctions on Russia, will certainly disrupt the trade of these materials with the west.
Additionally, the supply chain issues we have experienced throughout the pandemic are still at play. Many business owners find themselves unable to purchase goods as quickly and efficiently as they were able to pre-COVID, and we expect these problems to continue. Our best advice for business owners is to talk to your peers, buying groups, and industry associations about best practices for managing inventory and sourcing the products you need. Tapping into your network can be a great resource for idea sharing and can provide you with an outlet to share your frustrations.
Conclusion: Don’t panic, wait it out – this has happened before.
It is important to remember that this is not the first time we have seen political instability overseas impact the US economy and markets. Based on history, these volatile periods are likely temporary. For example, in February 2012, there was growing concern about potential military action by the US or Israel in Iran. Since Iran provides an average of 12-13% of the world’s oil supply, this concern led to a rise in gas prices in the US. In fact, by March 2012 the US national average for a gallon of gas was $3.91. That means that 10 years ago, during a similar crisis involving an overseas oil providing nation, US average gas prices were 38 cents higher than they are today. This comparison should provide some perspective to help investors and small business owners refocus from short-term noise to long-term strategy.
In summary, while the recent news headlines may cause growing anxiety, it is important to remember that we have been here before. Historical trends indicate that any significant surges in the cost of gas, increased volatility in the stock market, and additional supply chain disruptions are usually short lived. Therefore, it is important that we focus on our long-term financial goals and our strategy to reach our goals because these are areas where we have more control. During volatile times, we believe that focusing on what you can control is a best practice for your mental and financial health.