Between a falling stock market, rising inflation, and growing fears of recession, Americans are tuning in to the economy.
And somewhere Vladimir Putin is probably smiling about that.
Amidst all the chaos, inflation has become almost every American’s number one financial concern as prices of everything from gasoline to groceries soar.
There are several reasons why inflation hit a 40-year high at 8.6% last month, including rising rents and labor costs. However, economists say that Russia’s invasion of Ukraine and the resulting disruption in the commodity market is one of the main causes.
“The Russian invasion and the rise in oil and other commodity prices are the main reason, followed by the pandemic and housing shortages,” wrote Mark Zandi, chief economist at Moody’s Analytics, in a recent Twitter thread.
February’s invasion immediately shook the global economy and sent international markets into a spiral of uncertainty. Some commodities, including oil and food, were particularly volatile due to limited supply from Ukraine and Russia.
In response to the invasion, Western powers imposed a crippling series of sanctions on the Russian economy. Hundreds of international companies left the country and Russia’s subsequent isolation resulted in a 3.5% drop in GDP there in the first quarter.
But even as Russia’s economy feels the pain, President Vladimir Putin continues to dictate global energy and food prices. Western sanctions are beginning to hurt the US and the rest of the world as recent energy prices have led to factory closures and slower growth in the US and Europe, proving that Russia has more clout than Western leaders thought.
If the war drags on, global financial institutions including the World Bank say it could have even more serious consequences for the US economy. And pundits are sounding the alarm about another financial threat unseen in decades: stagflation, a toxic combination of high inflation and slow growth.
The story goes on
“Amid the war in Ukraine, rising inflation and rising interest rates, global economic growth is expected to collapse in 2022,” World Bank President David Malpass recently wrote in the institution’s latest economic forecast.
The war will likely result in “several years of above-average inflation and below-average growth,” Malpass added. “It’s a phenomenon – stagflation – that the world hasn’t seen since the 1970s.”
The threat of stagflation
Stagnation occurs when growth slows significantly but the economy continues to be plagued by high inflation and high prices.
The US has not experienced true stagflation since the 1970s, when that decade’s high oil prices led to simultaneous slower growth, high unemployment and persistently high prices. Circumstances today are different than in the 1970s, but a prolonged war in Europe would entail very similar risks.
The war has caused severe supply shortages of energy, food and critical raw materials, including metals, which have been exacerbated by existing supply chain issues related to the COVID-19 pandemic and subsequent lockdowns at major Chinese manufacturing centers.
Supply bottlenecks and rising energy prices caused by the war have already led to European factories having to be shut down. Manufacturing and industrial production in the US is also beginning to show signs of slowing growth.
Lower industrial production could be a sign that a recession is approaching, as many economists are predicting. But as high fuel prices continue to be a driving force behind high prices, it’s the perfect combination for stagflation.
Putin’s revenge
Since the war began, a wave of Western sanctions has swept Russia’s economy, preceding the withdrawal of hundreds of foreign-owned companies and largely sealing the country off from the world economy. But while the sanctions have been brutal for the average Russian citizen, with Russia’s inflation rate already at 20%, the country’s massive oil and gas sector continues to play a huge role in global energy markets – and likely will for some time to come.
The European Union has pledged to reduce its dependence on Russian oil imports by 90% by the end of the year. But the continent still buys more than half of all Russian oil exports, and it could be a while before the West can fully wean itself off of Russian fossil fuels.
And even if Europe can reduce its dependence on Russia, the country continues to pursue lucrative energy deals with China and India. Limited global supply also means oil prices are likely to remain elevated, which will be a boon for Russian oil companies.
“In terms of rejection of our energy resources, this is unlikely in the next few years,” Putin said at a meeting with young entrepreneurs this week. And the Russian president might be right, as a recent analysis by Bloomberg predicted that Russian oil and gas revenues will be as high as $285 billion in 2022, up 20% year-on-year.
With Russia financially more stable than many in the West had hoped, Putin wasn’t afraid to shut off the gas valve to Europe. Just this week, Russia tightened gas flows and pushed up European prices by 24%, an act some experts called “politically motivated”.
As long as Putin has so much control over energy prices, the West will fear constrained energy supplies. And since fuel prices are one of the main drivers of US inflation, Putin’s actions could result in a prolonged period of high prices.
In the World Bank report, Malpass warned that the key to avoiding stagflation is to increase fuel production to bring prices down and control inflation. But with Putin seemingly willing to curb gas flows and ratchet up costs, keeping prices under control may be easier said than done.
Even if the invasion of Ukraine doesn’t go as planned for him, Putin can rest assured that the war is causing severe economic hardship in the West.
This story was originally published on Fortune.com