While the Russian invasion of Ukraine in late February 2022 has been tragic for Ukrainians and many around the world, we believe that the United States’ economy will be largely insulated from the impacts of the conflict.
The conflict may lead to temporarily elevated fuel prices and a reduction in trade with Russia, but we believe that the US will remain poised for continued growth.
Additionally, the conflict has resulted in a more cautious Federal Reserve, indicating that we may see fewer interest rate hikes than initially anticipated.
Lastly, shale oil producers may provide some relief for increasing oil prices.
The US Trade Value Loss Would Be Less Than One Percent of Total
The US maintains a relatively insubstantial trade relationship with Russia. According to the Office of the United States Trade Representative, the US exported $10.9 billion of goods and services to Russia during 2019. This means that Russia accounted for approx. 0.1% of the total $10.0 trillion of US exports during 2019.
Similarly, Russia accounted for $24.0 billion of goods and services imported into the United States during 2019. This represents approx. 0.2% of the $12.46 trillion of goods and services imported into the United States.
With these facts in mind, the US trade relationship with Russia is a very small portion of the US’ overall trade exposure.
While the US has not taken a direct role in the conflict, the US appears to be willing to provide both military and humanitarian aid, with congress authorizing over $54 billion of aid to Ukraine.
Russian Sanctions & Ukrainian Support Is the Stance of USA & Allies
US aid to Ukraine included $12.5 Billion of weapons, $9.4 Billion of economic support, $8.1 Billion of military intelligence, $7.0 Billion of food & health care assistance, and $6.0 Billion of military assistance.
In response to the conflict, US policymakers imposed sanctions on Russian institutions and individuals. The US has prohibited Russian financial institutions from conducting transactions in US dollars. US, Canadian, and European allies agreed to prohibit certain Russian banks from accessing the SWIFT network, which connects over 10,000 financial
institutions. The US has also blocked the exports of US technology into Russia, which will hamper Russia’s development of its military and aerospace sectors. The US directly sanctioned certain individuals with ties to the Russian government.
Additionally, the US has prohibited 13 state-owned companies from raising money in the United States. Sanctions put in place by the US and other allies have caused a collapse in value of the Russian Ruble. Between February 21, 2022 and March 7, 2022, the exchange rate between the Ruble and USD was nearly cut in half. Lastly, many private American businesses, such as Visa. Apple, McDonald’s, and Starbucks have reduced or halted their operations in Russia.
Fuel Price Spike Should Only Be Short Term
As a result of the conflict, the United States banned imports of Russian oil. In 2020, Russia supplied the global economy with $72.6 billion of oil exports, or 11% of the total exported volume. Russia was second only to Saudi Arabia in terms of oil export volume.
However, Russian oil represented an insubstantial portion of American oil imports, approximately 3%. Nonetheless, the conflict led to a surge in gas prices, with the US average gas price spiking to an all-time high of $4.59 per gallon in May 2022. This represented an increase by over $1 as compared to the week before the Russian invasion. In California, the country’s most expensive state for fuel, the average gas price exceeded $6.00.
As the situation evolves, gas prices are likely to remain elevated for the short term. However, the increase in fuel prices is unlikely to be sustained over the long term. If oil prices remain elevated, American shale oil companies will be incentivized to increase their production, despite their higher costs.
Essentially, the shale oil companies may serve as a pressure relief valve. If oil prices get too high (as we are presently seeing) we would expect that shale oil companies would relieve this pressure by providing additional output.
This Will Be a Unique Time for the Federal Reserve
The Russian invasion of Ukraine comes at a time of transition for the Federal Reserve and the US economy. Spurred by a 40-year high in inflation, the Fed has indicated that they would be raising rates during 2022. Initially, some Wall Street firms were anticipating a federal funds rate of 2.75% to 3.0% by the end of 2022.
However, the conflict has resulted in a somewhat softer Fed. Traders are now expecting interest rates to reach 2.5% to 2.75% by the end of 2022. Concerning the conflict between Russia and Ukraine, Federal Reserve chairman Jerome Powell said, “The implications for the US economy are highly uncertain, and we will be monitoring the situation closely,” and that the central bank will “need to be nimble in responding to incoming data and the evolving outlook.”
While the conflict has led to tragedy for many Ukrainians, the US remains somewhat insulated from Russia. The US has instituted sanctions on multiple sectors of the Russian economy to disincentivize further escalation. While the conflict caused a surge in fuel prices, it has also provided additional opportunities for domestic shale producers. Lastly, the conflict has resulted in a more cautious Fed and will likely result in a reduced number of interest rate hikes.
The Impact of the Russian Invasion in Ukraine FAQs
How will the Russia & Ukrainian war affect the economy?
The Russia and Ukrainian war has already had a profound impact on oil prices , however American shale production will help alleviate the pricing pressure. We project that the short term spike in gas prices will not sustain itself.
How much oil does the US get from Russia?
The US has banned imports of Russian oil in response to their invasion of Ukraine, but in 2020 Russia supplied the world with $72.6 billion of oil exports (11% of the total exported volume of oil). However, only 3% of American oil imports were from Russia.
Why did Putin and Russia decide to invade Ukraine?
According to BBC News, Russian President Vladimir Putin’s original goal was to “demilitarize and de-Nazify Ukraine”. He made the unsubstantiated claim that Russian people have been subject to bullying and genocide by Ukraine’s government. Putin’s decision to invade has triggered the largest refugee crisis since World War II and is internationally condemned.