Russia’s invasion of Ukraine has sparked a global political crisis, with a humanitarian one expected to follow as civilian and military casualties mount and Ukrainians fleeing the violence create a dramatic flow of refugees into central Europe.
The attack also threatens to exact painful economic hardships. Global stock and energy markets plunged Thursday, as the invasion and widening list of retaliatory economic sanctions from the West (the most recent ones announced by President Biden Thursday afternoon) are expected to affect commodities, energy supplies in particular. Russia is a major source of oil and natural gas to Europe. The conflict is also forecast to worsen existing pandemic-related inflation, supply chain delays, and labor shortages in the U.S. and various nations around the world.
Kenneth Rogoff, Thomas D. Cabot Professor of Public Policy and Professor of Economics at Harvard, has written extensively about global financial crises. Rogoff spoke with the Gazette about how the Russian invasion and the likelihood of a lengthy war in Europe could impact the U.S. and global economies. Interview has been edited for clarity and length.
GAZETTE: What risks do a war in Europe between Russia and Ukraine pose for the global economy, one that is still dealing with record inflation and supply-chain problems from the pandemic?
ROGOFF: Russia is less than a tenth the size of the United States as an economy. On the other hand, their potential to wreak havoc is enormous. A war in Europe — an open-ended situation of long-term volatility and a complete upending of the post-Cold War equilibrium — is just catastrophic. Europe already was facing massive increases in energy prices. In Germany, natural gas prices were 10 times higher this winter than before. That’s been a big driver of inflation in Europe. Russia supplies one-third of the natural gas to Europe; Russia ships 10 million-plus barrels of oil a day. That’s not going to go out of circulation, but it’s certainly pushing up oil prices to over $100 a barrel, and they could go much higher. So, there’s definitely an effect on energy prices — that’s the big one.
It’s a good bet that this is going to be bad news for food prices, if for nothing else because it’s pushing up energy prices and energy prices are a big component of food prices. More directly, Ukraine is a big producer of grain, although obviously right now it is winter, and that effect is still to come.
Russia is also a very important supplier of many minerals; there are a lot of flight routes that go over Russia. But these economic considerations are small compared to the risks and uncertainty that are being created for Europe. Where is Putin going to stop? Is he going into the Baltics? If he does threaten the Baltics, what will we do? What further sanctions are we going to put on and what is Russia going to do back to us?
Where it certainly hits is the stock market, which is likely to keep going down as this keeps getting worse. As the market falls, and as uncertainty rises, it could slow down hiring, investment, and consumption. Businesses don’t like uncertainty; consumers don’t like uncertainty, either. The macroeconomic effects have just started to unfold. Clearly, the market, although it’s nervous, is still betting that this stabilizes. For the moment, this is much worse for Europe than for the United States. But then again, so was World War I and so was World War II, and we were eventually drawn into both.