How does the war in Ukraine affect the economies of the United States and the European Union?

Volatility and uncertainty have settled in the economies of the United States and the European Union (EU) due to the Russian invasion of Ukraine, which has placed one more obstacle on the road to recovery after the COVID-19 pandemic.

In response to this attack, Washington, the EU and the rest of the Western partners have announced unprecedented sanctions to punish the Russian regime of Vladimir Putin.

In parallel, the US and European economies will also suffer the consequences of the war and the sanctions in different ways.

Volatility in energy prices

The first difference has to do with the impact that the increase in energy prices will have for the United States and the EU, which depends much more on Russia.

The community club imports 41% of its natural gas and 27% of its oil from Russia, so any interruption of energy supply from Russia could translate into significant increases in the price of gasoline or electricity for citizens. and European business.

Unlike the EU, the United States has the capacity to produce its own gas and oil thanks to hydraulic fracturing and other forms of extraction, although it continues to import energy from other countries because its domestic consumption is much greater than internal production.

The United States, however, is much less dependent on Russia and only imports 7.9% of its oil from that country, according to the US Energy Information Administration (EIA).

At the request of several EU members, the arsenal of sanctions announced in recent days does not include restrictions on the Russian energy sector, although this has not prevented prices from skyrocketing.

more inflation

Rising prices for energy and other raw materials produced by Russia, such as aluminum and nickel, could lead to higher inflation in both the United States and Europe.

Currently, the inflation rate in the United States is 7.5%, a level not seen for decades and which will probably cause the Federal Reserve (Fed) to increase interest rates by 0.25 points this month, which are in a range between 0% and 0.25% from March 2022.

The rate hike was advanced on Wednesday by Fed Chairman Jerome Powell, who acknowledged that the Russian invasion of Ukraine will have effects that are still “highly uncertain” for the US economy.

Meanwhile, inflation in the eurozone has climbed to 5.8% in February and could increase even more due especially to the rise in energy prices, the French Minister of Economy and Finance, Bruno Le Maire, warned this Wednesday during a meeting of holders of the twenty-seven bouquet.

supply chain issues

The price increase could also be driven by problems in the supply chain, which is still trying to recover from the economic downturn caused by the pandemic.

In particular, the US and the EU may see the prices they currently pay to import goods, for example from China, both by air and by sea, rise.

Russia has closed its airspace to more than 35 countries, which means that any cargo plane that passes through the Russian sky will have to find another route, possibly spending more fuel to be able to fly.

By sea, the situation is not better with requests from some countries, such as Spain, for the EU to close all seaports to ships with the Russian flag, a measure that the United Kingdom already adopted on Monday.

Two of the world’s largest maritime container companies, the Danish Maersk and the Swiss MSC, have also announced the temporary suspension of all transport with Russia as origin or destination.

Long or short term effects?

The question, however, that experts are asking is whether or not the sanctions will have a lasting impact on the global economy.

The economist Hung Tran, former “number two” of the financial markets department of the International Monetary Fund (IMF), believes that the effect will be temporary because Russia, although it is a large exporter of energy, constitutes only 1.7% of the production and world trade.

In any case, the effects will be more severe for Europe, Tran explained in an article published by the Atlantic Council think tank in Washington.

Europe will suffer more because its economy is intertwined with Russia’s: the European Union is Russia’s largest trading partner; and Russia is in turn the fourth trading partner of the community bloc, according to the European Commission.

In the case of Washington, Russia is far down the list of preferences and is the number 26 trading partner, according to 2019 data from the Office of the United States Trade Representative.