Since Russian President Vladimir Putin announced an invasion into Ukraine on Feb. 24, several Western nations, including the United States, have united to impose economic sanctions on Russia. These sanctions include freezing assets of Russia’s national bank, banning Russian banks from the international financial messaging system SWIFT and phasing out imports of Russian oil and gas.
Business junior Taylor Bielefeld, co-president of the Global Investments Committee at the University of Michigan — a student-run investment portfolio that engages with local and global markets — said he was surprised at the speed with which sanctions were placed on Russia.
“The pace with which we’ve seen sanctions placed on Russia and the speed with which they’ve been shut out of the global economy has been quite astounding,” Bielefeld said. “I think that this is probably the best diplomatic tool that NATO (North Atlantic Treaty Organization) countries have to flex against Russia without becoming involved in the war themselves.”
Bielefeld said the sanctions on Russian oil could affect manufacturers across the world. He said many manufacturers rely on oil for inputs, and as the price of this input rises, so will the price of various consumer products.
“Manufacturers that rely on oils for input are probably going to see a period of rising costs which might add to the inflationary environment that we’ve been experiencing over the last 18 months or so,” Bielefeld said. “So I think that consumer prices might continue to rise.”
In addition to oil, Bielefeld mentioned wheat as a commodity that could have a great impact on global prices. Ukraine, known as the breadbasket of Europe, is one of the top three exporters of grain in the world. Finance professor Amiyatosh Purnanandam said the disruption in wheat and oil supply from Ukraine and Russia will exacerbate inflation.
“The war certainly is going to create disruption in supply,” Purnanandam said. “The reason this is very important is in terms of these two items, your energy source and food — that’s the core of inflation. That’s something that each one of us feeds on a day-to-day basis.”
Purnanandam said many countries, in addition to the United States, were experiencing inflation before Russia invaded Ukraine.
“The timing could not be worse because we were talking about inflation in the U.S. and around the world, even before this war,” Purnanandam said. “Now you have this war, and because of … the disruption in the sources of these two key products, the concern about inflation has become even worse than what anybody had talked about.”
Purnanandam said he worries the United States is at risk of experiencing stagflation if the war creates a recession at the same time that the country is experiencing high inflation.
“What will be a concern is that we will get into what we call a stagflation — that is a situation where we have high inflation and recession,” Purnanandam said. “That is really bad.”
According to Purnanandam, war comes with economic uncertainty.
“Whenever you have war, there is a lot of uncertainty, and the financial markets and the economy never like uncertainty,” Purnanandam said.
Bielefeld also spoke about this uncertainty and the negative impact it has on the stock market.
“Over the last two weeks or so since the start of the invasion, there’s been a lot of fear and uncertainty among investors, which is typically a very bad combination for equity prices, so the markets have fallen in a pretty swift manner,” Bielefeld said.
Bielefeld said this uncertainty leads to more caution for investors in the stock market, particularly given the context of the Russian invasion of Ukraine and the resulting inflation.
“Investors are definitely hyper-aware of the potential inflationary effects which would probably spook the markets further,” Bielefeld said. “The combination of uncertainty over a world war and increased inflation over the next six to 12 months is placing a lot of downward pressure on stock prices and that has a relatively negative effect for Americans invested in the market.”
Finance professor Paolo Pasquariello also said the war creates an uncertain stock market profile.
“Stocks have been collapsing over the last couple of weeks or so,” Pasquariello said. “During times of distress, investors look for the safest possible place to keep their money. Stocks are not safe. Stocks are volatile, and stocks are likely to be affected negatively by the war in Ukraine because European economies have suffered.”
Pasquariello said instead of investing in stocks, people are buying U.S. government bonds and treasury securities. He said this has led to the strengthening of the American dollar.
“Investors from all over the world, they’re doing the same thing as American investors,” Pasquariello said. “They’re selling (foreign) stocks and they’re buying the safest assets that they can find… U.S. Treasury securities that are traded in dollars… so the dollar becomes stronger and that’s going to hurt the American economy because it’s going to make American products more expensive for foreigners.”
Pasquariello said he is concerned about the effect that a stronger dollar — meaning the value of the American dollar is relatively higher than other currencies — will have on international students at the University.
“(International students) pay an expensive tuition,” Pasquariello said. “And the tuition is mostly paid by the families who live abroad and now they have to deal with a stronger dollar, which means their tuition has become overnight 10% or 15% higher depending on which country in the world they’re from.”
It is impossible to know how long this economic situation will last, but it likely won’t go away anytime soon, Pasquariello said.
“Another thing that is going to happen in the next several months is the Federal Reserve is going to increase interest rates,” Pasquariello said. “When you increase interest rates, people become attracted to the currency more and so that’s something else that is going to make this dollar stronger. So this is something that is not going away in the next few days or weeks by any means.”
Purnanandam said one thing the Federal Reserve could do is increase interest rates more slowly to mitigate the negative impacts.
“You have to raise interest rates to control inflation,” Purnanandam said. “So there’s no doubt that at some point, you will have to raise the interest rate. But given this war, possibly go a little bit easy on that so the financial market will stay stable and it will not collapse and therefore, economic growth will be maintained.”
The other political strategy Punanandam suggested to alleviate the effects of this war on the economy was to think about other energy sources, such as tapping into the Strategic Petroleum Reserves or trading oil with countries the U.S. hasn’t traded with previously.
“We have a lot of oil in our reserves,” Purnanandam said. “And there’s already discussions going on that we might start trading oil with other countries that we have not traded oil with … Because if you can do that, then you can dampen the one big source of inflation.”
Pasquariello said tapping into the Strategic Petroleum Reserve is a short-term solution that would not do enough to fix the problem.
“They’ve been talking about tapping into the strategic oil reserves, but that’s literally a drop in the bucket,” Pasquariello said. “There are millions and millions of gallons of oil in the strategic oil reserve, but the global market for oil is into the billions of gallons, and so that’s not going to affect the supply.”
He said instead of finding new sources of oil, the U.S. should be focusing on alternative sources of energy, such as nuclear power.
“In the long term, if you really care about how sensitive the U.S. economy is to these geopolitical shocks, you should diversify the supply of energy in the United States,” Pasquariello said. “That’s what … especially young people should advocate for — the global supply of energy in the U.S. to be much better diversified.”
Daily Staff Reporter Audrey Clayton can be reached at email@example.com