One glance at a social media feed is all it takes to know that the world is still enmeshed in a severe geopolitical conflict as Russia’s assault on Ukraine continues. Wartime triggers drastic shifts in the global economy, sending shockwaves through every industry. While the United States and our friends in Europe have imposed punitive sanctions against Russia to reduce or eliminate trade, it could be a devil’s bargain. Are we hurting ourselves more than we are hurting our enemy?
We don’t have a crystal ball. No one among us can say with any certainty what will happen or how the markets will fluctuate. All we can do is examine the early signs of where this is all heading from a global economic perspective. That perspective implies that, at present, it’s all about commodities, oil included.
Let’s begin by looking at the situation here on our own soil. At last, the United States appeared poised to recover from the pandemic. Fundamental economic indicators were looking strong, and we were on the verge of surging past pre-COVID levels of production and industrial output. But war has a way of shaking things up.
New supply chain disruptions (as if COVID had not caused enough) due to the Russian invasion have impacted the semi-conductor, food, building material, and energy industries. This hindrance is wreaking havoc, creating sky-rocketing energy prices and exacerbating an inflation issue, nudging it toward a 30-year high.
Though the United States has not been energy-dependent on Russia, the same cannot be said for our allies across the Atlantic. Unfortunately for those European nations, Russia possesses a great deal of the world’s oil and natural gas reserves. By turning away from Russian energy, Westerners are feeling the pain and economic impact of their own embargoes against enemy oil.
There are not yet enough alternate energy sources to meet demand; the longer the conflict draws out, the more it will hurt European nations. Will there come a time when European states must make a difficult choice? It may well come down to high prices paid by citizens for essentials – and consequently tougher conditions for everyday people – versus solidarity with Ukraine and the United States’ tough stand against Russia.
Meanwhile, Putin has been backed into a corner and is compelled to accept energy payments in Rubles. It might look bad for the Eastern European nation, but looks can be deceiving… because the enemy was well prepared. Russia is rich in natural resources and has pegged its currency indirectly to commodities.
About those Rubles – Russia’s friends in the BRIC (BRIC is an acronym for the economic bloc of countries of Brazil, Russia, India, and China) appear more than willing to oblige. These nations are projected to experience massive growth, creating an added bonus for Russia, given that the BRIC countries’ unit costs of energy have also increased.
All this leaves Russia in better-than-expected shape, with a recovered currency that is now back up to pre-war levels. The Ruble remains strong, interest rates fall, and their economy is decoupled from the Dollar.
These factors combined suggest that there are major tectonic shifts happening right now. There is a risk that the Dollar will lose its domination as the global currency for international trade; this would have a devastating impact on the U.S. economy. The balance of economic power might finally shift to the BRIC countries.
The geopolitical uncertainty leaves many investors questioning whether they should stay the course or flee to the safety of bonds and other fixed interest instruments. So much will depend on what happens in Ukraine in the next few weeks and months. We will soon find out if sanctions on Russia are ultimately tougher on them or on us. If the BRIC nations can devise a way to trade without using the Dollar as the reserve currency, it could send a tsunami through our financial system.
