While headlines the last few weeks have been dominated by the ongoing conflict between Russia and Ukraine, the tumultuous history between the two nations has long been on display. 1793 saw the first annexation of Ukraine by Russia—subsequently invoking the origins of the process known as Russification—which acted to quell Ukrainian culture. Fast forward to the 21st Century, with Russian troops yet again on the precipice of a potential Ukrainian annexation.
From a political and humanitarian perspective, the conflict signals yet another human rights violation committed by the Russian Federation. While most news coverages have focused on the physical implications of the conflict, perhaps the more widespread influence can be viewed on a macroeconomic level.
According to Reuters, the Euro/Swiss Franc exchange rate has long been “the biggest indicator” of geopolitical risk in Europe, with the Swiss Franc holding views by investors as “a safe haven.” In response to the Russia-Ukraine tensions, the exchange hit its strongest levels since “May 2015 in late January [of 2022].”
Moreover, the energy markets—specifically natural gas—have the potential to be significantly impacted, with Europe relying upon Russia for 35% of its natural gas, mainly through the Nord 1 stream, which goes directly to Germany (among other nations) via Ukraine. Oil also has the potential to be impacted, with JP Morgan stating that tensions “risked a ‘material spike’ in oil prices,” noting that a rise to $150 per barrel (a 66% increase) would reduce global GDP growth to just 0.9%.
While a 66% increase appears significant, according to Ed Hirs, an energy fellow at the University of Houston, a one-percent decrease in supply could trigger a 20-25% increase in the price of oil.
On the manufacturing front, the main cause for concern is the close relationship between China and Russia—which US and European officials have dubbed a “non aggression pact.” According to John F. Kirby, the Chief Pentagon spokesperson, “China was standing behind Mr. Putin’s military buildup around Ukraine.” (More on Chinese-Russian cooperation here).
The U.S. depends on Chinese manufacturing for a significant portion of total goods and services consumed. As a whole, foreign imports accounted for 12.2% of total goods and services consumed by the US in 2015.
The economic dependence on China does not end there, as illustrated by the fact that “Over 70% of active pharmaceutical ingredients used in the U.S. markets are produced overseas,” with China making up a significant portion of that percentage. Of foreign imports, China accounted for 95% of ibuprofen, 91% of hydrocortisone, 70% of acetaminophen, 40% to 45% of penicillin, and 40% of heparin according to Commerce Department data. As a whole, China accounts for 97% of all antibiotics in the United States according to a Department of Commerce study.
With all this being said, how imminent is this conflict? According to US estimates, between 169,000 and 190,000 Russian troops are stationed along Ukraine’s border (including rebels in eastern Ukraine). According to British Prime Minister Boris Johnson, this could be “the biggest war in Europe since 1945, just in terms of sheer scale.” Clearly, the cause for concern is real. As Johnson went on to say, any invasion of Ukraine would “echo around the world,” and right now, we are currently standing in the cave waiting for the first shout.
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