President Joe Biden on Tuesday acknowledged the likelihood that U.S. and allied sanctions on Russia in retaliation for an invasion of Ukraine would have significant blowback on the American economy, including possible price hikes and disruption to the nation’s energy supply.
“The American people understand that defending democracy and liberty is never without cost,” Biden said in remarks at the White House about the ongoing crisis. “I will not pretend this will be painless.”
Economic sources believe the invasion will not only have an impact on markets but gas prices and inflation rates.
So where exactly might Americans feel the effects?
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Biden said the administration was working proactively to try to preempt supply issues by working with energy producers and shippers on contingency plans, and said he would work with Congress on unspecified “additional measures to protect consumers and address the impact of prices at the pump.”
Phillip Braun, clinical professor of finance at Northwestern's Kellogg School of Management, said "it's going to have a major impact at the gas pump."
Those rising gas prices could help fund the war effort for Russian President Vladimir Putin.
"Every time the price of oil goes up, that means Putin adds to his war chest," said Karen Alter, a professor of international relations at Northwestern University. "He's a petrol state, and he has taken over all control of the gas industry so that the profits go directly to him, so he kind of wins by the price of oil and gas going up."
European gas prices jumped on news of the invasion, while international benchmark Brent crude futures surpassed $100 a barrel for the first time since 2014.
"While Western governments probably will exempt energy transactions from sanctions, the blizzard of new restrictions will force many traders to be exceedingly cautious in handling Russian barrels," analysts at political risk consultancy Eurasia Group said.
"Gas transiting Ukraine will likely be disrupted, affecting supplies to several central and eastern European countries, and raising gas prices in Europe," they added.
The conflict is adding to the surging energy prices already plaguing Europe and the U.S., crimping consumer spending and holding back economic growth. If oil prices rise to $120 per barrel and gas prices remain elevated, inflation would rise by a full percentage point and slow economic growth this year, analysts at Berenberg bank say.
"Globally we’ve seen stock markets drop today 2,3,4% around the world including U.S. markets," Braun said Thursday.
Some relief flowed through Wall Street on Friday, even as deadly attacks continued to rage in Ukraine. Stocks rose, oil fell and investors turned away from gold and other traditional havens they favor when fear is high.
Stocks have swung sharply with uncertainty about how much Russia’s invasion will push up inflation, particularly oil and natural gas prices, and drag on the global economy.
Such big swings are likely to continue in the hours and weeks ahead, with so much uncertainty not only about Ukraine but also about interest rates. The Federal Reserve is caught in a delicate dance where it has to raise interest rates enough to rein in high inflation but not so much as to cause a recession.
Prices for everything from stocks to Bitcoin have been swinging sharply with the uncertainty about Russia and Ukraine.
Many individual investors are feeling the recent market declines triggered by geopolitical risks personally, particularly when it comes to their retirement account balances.
Some 401(k) plans may offer automatic rebalancing features, which can help make sure your portfolio doesn't get too misaligned, certified financial planner Marguerita Cheng, CEO of Blue Ocean Global Wealth in Gaithersburg, Maryland, said. Opting in may come with fees, but can give you peace of mind that your portfolio is getting rebalanced once every quarter or every year, for example. (More advice here.)
Russia’s invasion and the likely resulting rise in inflation have increased pressure on the Federal Reserve, which is expected to raise interest rates by a quarter-point as many as five or six times this year beginning in March. The Fed’s delicate task — to raise rates enough to restrain inflation, without going so far as to tip the economy into recession — has now become more difficult.
Higher gas prices typically accelerate inflation, which would heighten the need for rate increases. But costlier gas can also weaken the economy by slowing consumer spending, something that would normally lead the Fed to leave rates unchanged.
Fed officials are acknowledging that the invasion of Ukraine has complicated the economic outlook, but say that so far they are sticking with their plans for rate hikes.
Loretta Mester, president of the Federal Reserve Bank of Cleveland, said Thursday that she supported a series of rate hikes beginning in March. But she said the Fed should remain flexible: Faster rate hikes might be needed, she said, if inflation hasn’t begun to fade by mid-year, or more gradual increases if inflation is slowing.
“The implications of the unfolding situation in Ukraine for the medium-run economic outlook in the U.S. will also be a consideration,” she said. Other Fed officials have offered similar remarks this week.
Farmers have seen higher costs to fuel their equipment and those costs will turn up in food prices as well. Some people who switched to discount providers — who rely on energy from wholesale markets — have been sticker-shocked with sharply higher bills or had their contracts canceled when the supplier faced losses from high prices.
Most companies hedge to protect themselves from short-term spikes in commodity prices, although at this point it's unclear how long the crisis will persist and when shoppers will start feeling the pinch.
The costs of other commodities that are produced in Ukraine, such as wheat and aluminum, have also increased.
As Russia steps up its cyberattacks on Ukraine alongside a military invasion, governments on both sides of the Atlantic are worried the situation could spill over into other countries, becoming an all-out cyberwar.
Russia has been blamed for a number of cyberattacks targeting Ukraine's government and banking system in recent weeks.
For its part, Russia says it "has never conducted and does not conduct any 'malicious' operations in cyberspace," but an onslaught of attacks has led to fears of a wider digital conflict, with Western governments bracing for cyberthreats from Russia — and considering how to respond.
Officials in both the U.S. and Britain are warning businesses to be alert to suspicious activity from Russia on their networks. Meanwhile, Estonian Prime Minister Kaja Kallas on Thursday said European nations should be "aware of the cybersecurity situation in their countries."
NBC News reported Thursday that Biden has been presented with options for the U.S. to carry out cyberattacks on Russia to disrupt internet connectivity and shut off its electricity. A White House spokesperson pushed back on the report, however, saying it was "wildly off base."
Nevertheless, cybersecurity researchers say an online conflict between Russia and the West is indeed a possibility — though the severity of any such event may be limited.
"I think it's very possible, but I think it's also important that we reflect on the reality of cyberwar," John Hultquist, vice president of intelligence analysis at Mandiant, told CNBC.
"It's easy to hear that term and compare it to real war. But the reality is, most of the cyberattacks we've seen have been nonviolent, and largely reversible."