Jeffrey P. from Springfield, MO asks: Hello Mitch, I’m sure you’re getting a lot of questions on Russia, but here’s one more. Do you think the economic sanctions could have unintended consequences on the U.S. or global economy? Maybe in the form of much higher energy and commodity prices? How might that affect stocks?
Mitch’s Response:
Thanks for writing. That’s a great question. The economic sanctions story is still developing as I write, and there will no doubt be more sanction pronouncements after I send this off to you.
The latest sanction is pretty hard-hitting – the United States announced it is sanctioning Russia’s central bank, to prevent it from using its $630 billion in foreign reserves to cushion the economy and the Russian ruble against all of the other economic penalties and fallout. Last week, the Russian central bank was able to use those reserves to halt a crash in the ruble, but that option is now off the table. Russian stock markets have also stopped trading.1
Point is, sanctions so far will certainly have a meaningful economic impact on Russia. The U.S. has very little trade exposure to Russia – total imports and exports from Russia to the U.S. is a fraction of 1% of total trade. Europe has greater exposure with 40% of all natural gas coming from Russia, but so far deliveries have not been interrupted and spring is coming, which should temper demand in the months ahead.
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I think you are right to point out that near-term, energy, and commodities markets could feel some upward pressure. I would not be surprised if oil prices climb to above $100 per barrel. But as I have written before, the effect of higher oil prices on the global economy and markets may not be as drastic as many people fear. A $10 per-barrel increase in the price of oil may increase U.S. headline inflation by less than 1% and could hit GDP growth by about 10 basis points – not super meaningful. It is also worth remembering that oil prices (chart below) remained firmly above $100 a barrel from the beginning of 2011 through the summer of 2014, during which time the U.S. economy grew and the stock market went up by over +50%. In short – higher oil prices do not necessarily mean economic recession or weak markets.
Source: Federal Reserve Bank of St. Louis
It is also important to consider that oil markets are global. If Russian supply falls in the next few months – which is not a foregone conclusion – then we might see supply increase elsewhere, such as from U.S. shale producers or Saudi Arabia, for instance. Time will tell.
I do think there is a risk to a full-scale trade war emerging between Russia and trading partners, which would no doubt create problems in the commodity supply chains and drive up prices. At this stage, Russia is very unpredictable – but launching a full-on trade war would hurt them the most, given government revenue relies on the export of natural resources. With Russia already greatly hobbled by broad, international sanctions, cutting off the West economically could send its economy into a rapid downturn (which may already be in the offing). But again, time will tell.
My final thought here is that the stock market has likely already priced in all manner of scenarios that might emerge from here. Even if commodity prices continue rising – which is a distinct possibility – it needn’t derail the global economic recovery that’s underway. The global economy can withstand higher commodity prices in the near term.
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