Ramifications of Russian military conflict
My last blog was discussing some financial concepts and lessons you can learn from the Russian & Ukrainian conflict; since then, Russia began an invasion into Ukraine, causing the world to be privy to the military conflict happening in Ukraine. Today, I want to take a look at this conflict from an economic and financial perspective and continue the theme of the last blog, in which analyzing the tensions yielded certain lessons about financial markets.
The first thing we will discuss is the economic actions that other nations and countries are taking against Russia. Many global powers do not agree with Russia’s actions, so they have taken certain economic measures and placed sanctions on Russia. Sanctions are economic and financial penalties that can be applied by more than one country against some entity (in this instance, Russia). Understand that these sanctions are not only applied for militaristic circumstances, and they can be applied for a variety of economic, social, and political issues. These sanctions placed on other countries are harsh and will cause detrimental impacts to the Russian economy and financial system.
A specific example of one of these sanctions is the Biden Administration prohibiting any transactions with the Russian Central Bank, effectively preventing any American from doing business with the Russian central bank. Another example of a sanction being placed on Russia is freezing Russian assets within the banks of western powers. U.S. financial institutions along with European allies & Japan froze all Russian central bank assets, meaning that they are completely stuck and cannot be moved. In doing so, Russia no longer possesses the power to stabilize and support its currency in response to the other sanctions that western powers are placing on Russia, effectively dealing a heavy blow to their financial sector. To further demonstrate the sanctions being placed on Russia, we can take a look at the impact of sanctions placed on the Russian Direct Investment Fund. The Russian Direct Investment Fund is a key sovereign wealth fund utilized by Putin and an inner circle of Russian Oligarchs to raise funds in foreign countries, including the U.S. In restricting this wealth fund, it is cutting off exposure to the U.S. financial system and directly hurting Putin and his allies supporting this war by imposing costs on them.
Another aspect of this military conflict we can look at is the repercussions on oil; Russia is the third-largest oil producer in the world, meaning that you have to speculate that this military conflict has some effect on oil prices and supply. Evidently, it does, through the sanctions placed on imports of Russian oil. In doing so, the U.S. ensured they would not be indirectly funding the war that Putin has enacted. In addition to this, let us understand the reverberations this could have on the U.S. economy: banning such large imports of oil increases the cost of gas here and adds to already existing inflationary pressure. Higher gas prices lead to higher levels of inflation due to the way it is measured, as inflation is tracked through the change in prices of common consumer goods that include gasoline. Higher prices in gasoline lead to a higher chance in the CPI, which indicates higher levels of inflation. To learn more about inflation, refer back to an earlier blog of mine where I break down inflation.
High gas prices also decrease economic growth because of the effect it has on an individual’s and family's budget. By causing the general population to spend more on purchasing gasoline, you are left with less spending money; less spending means less economic stimulation and thus less economic growth. Prices of products unrelated to oil may also rise, as transportation costs (that gasoline is a part of) are passed onto the price of the product, leading to more inflation and less spending. It has an even more of an impact on products that utilize petroleum to manufacture it, as it would cost more to manufacture those products because of higher petroleum prices. Higher gas prices also tend to decrease the volume of people shopping in that they are less likely to drive to shops and malls, thus contributing to less spending and less economic growth. Understand that these ramifications are not being currently observed (at least to my current knowledge), but can happen in response to high gas prices. I am simply demonstrating the widespread economic reverberations that this military conflict can have in order to explain economic concepts.
The aim of these summaries and analyses is to convey information about a vast and complex area of study; utilizing current events is a convenient way of conveying this information as it is happening that is relevant to you. By analyzing current events such as these on a regular basis, you may gain a more complete and thorough understanding of economics, and their prevalence in your life.