As local and state economies were starting to emerge from the COVID-19 grip, the economic outlook was hit with supply chain issues due to the slow revival of the manufacturing sector and other related issues. In recent weeks, the Eastern European conflict has made the global economic forecast even more grim with certain sectors of the economy bearing the brunt of Russia’s invasion of Ukraine, with the global energy sector being the prime example.
As a retaliatory measure, global sanctions will not only serve as a detrimental blow but also have long-lasting impacts on Russia’s economy. However, the effects of the Russian economic downfall will likely also be felt at the global level for years to come.
In this article, we will take a closer look at the domestic and global ramifications, especially in the financial and energy markets, of the Eastern European conflict and the world’s retaliation.
Be sure to check our Municipal Bonds Channel to stay up to date with the latest trends in municipal financing.
Macroeconomic Outlook Due to Sanctions on Russian Economy
There are two key indicators to assess the overall impact of the world’s sanctions on the Russian economy: energy supply disruptions for areas dependent on Russian energy, and their ability to procure and meet energy needs without the Russian supply.
Energy dependency will likely be the key concern for countries like Germany that halted their pipeline operations from Russia to Germany, as part of the sanctions proposed by the West, and their plans to meet their growing energy needs.
Furthermore, Russian financial markets are also bracing for the worst in the upcoming weeks due to the various sanctions: the Russian stock market remains shut, one Russian ruble is worth less than a penny (USD), and Western businesses are exiting the country. In a recent assessment, JP Morgan states that “sanctions leveled by the United States on Russian government entities, countermeasures within Russia to restrict foreign payments and the disruption of payment chains present high hurdles for Russia to make a bond payment abroad,” which could make the case of a technical or logistical default due to foreign sanctions impacting Russia’s ability to access foreign currency markets to make its debt service payments.
It’s also important to note that the sudden nature of the Russia-Ukraine conflict will likely affect certain geographic regions more than others mainly due to their respective dependency on Russian energy and exposure to Russian financial systems. The U.S. may be more financially insulated from the effects of Eastern European conflict than other regions in Europe and the Middle East.
What’s at Stake for the World to Consider
Besides the condemnation, the global response to the Russian invasion has primarily been sanctions related to Russian financial markets, individuals, and the economy in general. Although the long-term effects of these sanctions will likely be detrimental to its economy and GDP, they haven’t deterred President Putin from moving ahead with his Ukraine invasion.
The world is also waiting to see the Russian retaliation to the global condemnation and sanctions. S&P Global Ratings assessed some startling figures related to the Russian market share in certain markets related to raw materials and production of commodities, which can be used to retaliate against sanctions at a global level:
- Russia is the second largest supplier of palladium, accounting for over 37% of global production. This chemical element is typically used in sensors, computer memory chips, and some automotive parts. Russia is also a leading producer of titanium, often used in the aerospace industry and corrosive resistant applications.
- Russia maintains a stronghold on fertilizer products, including being the largest exporter of ammonium, nitrate, and urea.
Another important factor to consider is that if Russia is successful in its invasion of Ukraine, the Ukrainian production and supply of raw materials can potentially fall under Russia’s control, leading to significant market shock for countries trading with Ukraine. Here are a few examples:
- Ukraine is the leading supplier of inert gasses for semiconductor lithography, supplying roughly 90% of U.S. semiconductor-grade neon.
- Ukraine ranks fifth in titanium sponge supply in the world; as aforementioned, this chemical metal is often used in the aerospace industry.
- Ukraine is a leading supplier in agricultural products, including seed oils, corn, barley, wheat, and other products.
Don’t forget to check our Muni Bond Screener.
Europe’s Energy (In)Security & More
The entire European Union relies on net energy imports, including reliance on Russian energy. The recent statistics published by S&P Global Ratings indicate that European energy imports consist of 70% oil, 19% natural gas, 6% LNG, and 3% coal. Plus, 47% of natural gas and 25% of oil is imported from Russia. Put differently, the EU imports more than one-quarter of its energy from Russia (26.4%), which makes the country the largest supplier of natural gas and oil to the EU. To gain independence from Russian energy imports, the EU must find alternatives to meet its energy needs; given the Russia-Ukraine conflict, it’s more important to figure out how quickly Europe can substitute the Russian energy supply.
Beyond energy security, European nations are also planning for the humanitarian crisis caused by the war and the potential displacement of millions of Ukrainians as the war continues.
The Bottom Line
The humanitarian crisis and the global economic ramifications of the Russian invasion are still unfolding; it’s impossible to predict the future of this conflict. However, it’s also important to consider that Russia is no stranger to economic and other sanctions from the West; some of which have been ongoing since the Crimean annexation in 2014, and some even before then. The global financial shock related to this invasion will likely be felt in U.S. financial markets.
Sign up for our free newsletter to get the latest news on municipal bonds delivered to your inbox.