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Diane Alleva Cáceres and John McIntyre
Diane Alleva Cáceres and John McIntyre

The Financial and Economic Ramifications of the Ukraine-Russia Conflict

The current Ukraine-Russia conflict has many of us on edge. Will Russia’s return to the Ukrainian border signal the beginning of another takeover? In 2014, Russia annexed Crimea, part of Ukraine, as the world watched. Sanctions ensued, but Crimea today remains part of Russia. Is this a repeat only with an entire nation at stake?

To understand some of the moving pieces of the current crisis, we talked with two Georgia Tech Scheller College of Business faculty experts about the financial and economic ramifications both in the U.S. and Europe should Russia decide to invade: John McIntyre, professor of Strategy & Innovation and executive director of the Center for International Business Education and Research (CIBER); and Diane Alleva Cáceres, lecturer at Scheller and the Sam Nunn School of International Affairs.

Is the current Ukraine-Russia standoff disrupting any economic activities in the U.S. now?

McIntyre: At this point, economic activities in the U.S are not disrupted other than creating a sense of uncertainty impacting the equity markets on certain days, depending on the evolution of negotiations and various media-reported moves by the Russian military on the boundary line.

Will the U.S. be affected financially if Russia invades Ukraine?

McIntyre: Directly, I doubt it. Overall, the level of trade between Russia and the U.S. is at about $35 billion annually. However, if Russia weaponized its natural gas or crude oil pipelines to Europe, the price of natural gas as a commodity on international energy markets would be felt worldwide and in the U.S. as well, though to a lesser degree given large U.S. home supplies. But this could be problematic for Russia. A greater looming threat of outright military conflict will also impact the U.S. and global stock markets, though a lot of the current jitteriness reflected in the VIX Volatility Index is more related to interest rate issues.

If Russia invades Ukraine, what types of sanctions would the U.S. apply and would they be effective?

McIntyre: We have seen that U.S. sanctions can be effective (for example, U.S. export controls on Huawei Technologies Co, the Chinese telecom giant). In the case of Russia, the applications of country-wide U.S. export controls (with which NATO allies would comply) would hit critical Russian sectors such as aerospace, artificial intelligence, and computing in all its forms. Russia cannot easily replace or substitute high-tech components through different supply networks. In my opinion, Russia’s industrial economy in time, would be hit quite hard. 

The U.S. would seek to exclude Russia from the SWIFT system, the Brussels-based global provider of secure financial transactions (for payment or speculation). This might be a double-edged sword measure and Russia might team up with China to further develop an alternative system. Additionally, the U.S. could ban Russian firms and actors from U.S. dollar-denominated transactions, noting that oil and gas exports are denominated in U.S. currency. Here again, the effects can be paradoxical. Finally (and this is already in play both in the U.S. and EU), individual government officials could be targeted for asset-freezing and travel bank measures.

It is key to consider that Russia derives a substantial part of its budget from oil and gas sales on international markets. A barrel price falling below $42 would cripple the Russian economy. Any point above this can be considered a useable resource. JP Morgan Chase stated last week that Brent oil prices could soar to $150 a barrel if supply tensions from Russian materialized. This kind of surge to that level is a 100% plus increase from the current $75 end-of-2021 levels. The question then becomes one of Russian belt-tightening and tolerance for economic pain. Calculating at what point the sanctions would have their greatest effect is an open question. 

What types of imported products and services do European countries receive from Russia?

Alleva Cáceres: In 2020, two-way trade in services between the EU and Russia reached €27.7 billion or $31.3 billion.

McIntyre: The EU is Russia’s primary export partner. This is mostly made up of mineral fuels and oil, iron and steel, copper, aluminum, nickel, and some machinery.

Does the current situation create a big dilemma for other nations who want to protect Ukraine but may be afraid of going against Russia?

Alleva Cáceres: Yes. The biggest threat for EU countries wanting to protect Ukraine would be Russia’s potential retaliation in the form of restricting access to oil and gas and cyber-attacks. Germany is Russia’s largest trading partner so it will have more at stake. Other EU and non-EU member countries would have to calculate the switching costs related to shifting to other suppliers in similar industries and products. The threat could also speed the introduction of renewable energy, though at a high cost short-term.

In 2018, the Baltic countries - Lithuania, Latvia, and Estonia, along with Poland - agreed to synchronize their electricity grid with continental Europe’s by 2025, requiring these countries to switch from Russia and Belarus’ energy system. This strategic move, along with Poland’s goal to shift its dependence on Russian crude oil to other suppliers such as Saudi Arabia, may be hastened by Russia’s behavior. It may also embolden Poland to support Ukraine. Saudi Arabia, however, wants to balance its relationship with both Poland and Russia.

In addition, while the EU is heavily dependent upon crude oil and natural gas imports from Russia, Russia relies on high technology imports such as advanced software, hardware, chips, and semiconductors from Europe, the U.S., Korea, and Japan. These countries can leverage (and President Biden is threatening to do so) their technological strengths, limiting exports to Russia and slowing down the country’s long-term economic development.

McIntyre: It does. Noting that France, Germany, Ukraine, and Russia are involved in “Normandy Format” diplomatic negotiations which does not include the U.S. nor the UK, we are now cut off from the EU. A very sticky issue is the opening of the Nord Stream 2 natural-gas pipeline from Russia to Germany. It is a completed project awaiting German approval. Would Germany at the height of winter agree to turn down these supplies in case of Russian aggression? The new German government is willing to use the pipeline for diplomatic negotiations, but it is unsure to what extent.

Do you think European countries will apply their own sanctions against Russia?

Alleva Cáceres: I think this depends upon both an economic and political calculation of the risks and rewards associated with the decision. Larger European countries, such as Germany and France, as well as smaller former Soviet republics such as the Baltic countries are more dependent upon Russian trade, primarily oil. Now we see EU member countries questioning the potential over dependence upon Russian oil and gas should the Nordstream 2 oil pipeline be activated.

I would argue that one of the greater long-term risks of countries applying their own sanctions unilaterally against Russia would be escalating Russian cyber-attacks against key strategic industries and government agencies. NATO member countries would have to weigh the benefits of a unilateral versus multilateral response against potential costs, namely, damaged relations with NATO and its security regime.

McIntyre: Yes, but their efficacy can be questioned to some extent. The EU has in the past levied its own sanctions against Russia in the case of Crimea, variously implemented by member states.

Do you think Germany will go along with any NATO sanctions considering their dependence on the Nord Stream 2 pipeline?

Alleva Cáceres: As the largest energy consumer in Europe and the seventh-largest energy consumer globally, it’s important to understand the extent of Germany’s dependence on imported oil and gas. According to the U.S. Energy Information Administration (USAIE), petroleum represents 35% and natural gas represents 25% of Germany’s total primary energy consumption. Russia is the largest supplier, followed by Norway and the UK.

For years, Germany has been transitioning to renewable energy, phasing out its nuclear reactors and coal, and reducing its stored gas levels. However, the country still relies significantly on Russian crude oil and natural gas. Currently, Germany’s gas prices are the highest in Europe. In the near term, it would be difficult to go along with NATO sanctions without some guarantees of access to reliable sources of energy. Without German support of NATO sanctions, I would argue that those sanctions will not be as effective in preventing Russia from invading Ukraine. However, a secondary result could very well be the strengthening of NATO via the addition of new members, including Sweden and Finland.

Furthermore, a Russian invasion may delay Nord Stream 2 activation to allow sufficient time for NATO member countries, including Germany, to evaluate options to further diversify energy sources. A middle road seems to be developing based on comments by President Biden, U.S. Secretary of State Anthony Blinken, Germany’s new Chancellor, Olaf Scholz, and French President, Emmanuel Macron, all with their own interests. The scale and nature of NATO’s response would depend upon the scale and nature of Russia’s invasion.

McIntyre: At the height of winter, it is not obvious that the new German government would turn off the major natural gas pipelines originated in Russia, although the new chancellor has signaled a willingness to consider the move. 

Are there any other countries such as those in the United Arab Emirates (UAE) that will be affected?

Alleva Cáceres: Over the last number of years, we’ve seen increased Russian/UAE cooperation in Middle Eastern security and energy. In terms of energy, the UAE, Saudi Arabia, Russia, and other member of OPEC Plus have agreed to oil price regulation in response to economic and political forces. OPEC Plus members will be affected by Russia’s behavior towards Ukraine insofar as it elicits a convincing economic and/or military response by the U.S. and NATO, especially given the UAE and Saudi Arabia’s long-standing security partnership with the U.S.

In addition, as a supplier of crude oil to Poland’s refineries, Saudi Arabia will have to navigate its relationship carefully with Russia. How these countries weigh the costs and benefits of a decision to support Ukraine, again, depends upon their economic and political interests and potential retaliation by their partners, including Russia, the U.S., and select NATO members. 

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