Russia and Ukraine: Potential economic impacts of war

What Vladimir Putin’s invasion of Ukraine could mean for the United States

The recent news about Russia’s invasion of Ukraine has injected uncertainty into the market and may have you wondering how the U.S. economy could be affected. At this point, it’s impossible to know for sure what the long-term implications will be, but we do know this new uncertainty could mean we see even more volatility as markets seek to find a new equilibrium.

Read on to learn what’s going on with Russia and Ukraine and how your finances may be affected.

What’s going on with Russia and Ukraine?

Russian forces have invaded Ukrainian territory with the apparent goal of forcing a regime change in the country immediately to its southwest. It wasn’t exactly a surprise: Russia had been massing troops and equipment at multiple sites along the Ukrainian border for months, and an attack in one form or another had been predicted by the intelligence community since at least January.

So far, the U.S. and her allies have responded with economic sanctions and materiel support for Ukraine. The prospect of U.S. and NATO military forces entering the conflict as combatants has been ruled out unless Russian forces extend their invasion beyond Ukraine’s borders.

How will the conflict in Ukraine impact markets and the U.S. economy?

It’s impossible to know for sure, but the immediate market reaction was telling. Equity markets opened lower on the day of the invasion, but the declines were surprisingly modest. One possible explanation is that recent stock market declines, the ongoing normalization of Federal Reserve Board policy and three months of rising oil prices better prepared financial markets for this kind of shock.

Oil prices. Russia is a significant producer and exporter of crude oil, and oil is part of virtually everything we consume, sometimes in the production process itself and always as part of the supply chain that brings products to us.

The sudden removal of even a portion of those barrels — and a continued rise in oil prices — might ultimately cause economic growth in the U.S. to slow substantially through the potential impact it has on inflation.

Sanctions. For now, out of concern for the damage it might do to our allies in Western Europe, the U.S. has refrained from excluding Russia from the global payments network called SWIFT. This would have effectively cut Russia off from global commerce in a very real and comprehensive way.

The sanctions enacted so far seem to have been crafted in a way that attempts to avoid some of the biggest “pain points” they might otherwise cause, including a carve-out for energy transactions denominated in foreign currency and exempting major industrial commodities, such as aluminum.

Keep in mind that the impact of trade restrictions is every bit as complex and unknowable as the sudden removal of a significant amount of oil production. As Russian aggression continues to evolve, so will the West’s response.

Responding to uncertainty in the market

It’s tempting to be reassured by the relatively calm nature of the market’s immediate response to Russia’s invasion of Ukraine. It’s equally true, however, that the potential for a massively negative reaction to recent events in Europe still exists.

And when markets are volatile, the temptation to do something can be overwhelming. Quite often, though, your actions, not the market itself, can have the biggest impact on whether or not you reach your financial goals.

Here are a few strategies you may want to consider when responding to market volatility.