How the Russia-Ukraine Crisis is Affecting Economics Markets

Photo by Marjan Blan | @marjanblan on Unsplash

Russia and Ukraine have a complicated history. Russia has opposed the possible membership of  Ukraine in the North Atlantic Treaty Organisation ‘NATO’, an intergovernmental military alliance between 30 different countries with the aim of guaranteeing freedom and security of its members. Russia’s President Vladimir Putin sees NATO as a threat to its borders, and Ukraine being a part of NATO would mean that they will be eligible for collective support by other NATO countries if there is an attack. 

This is not the first time that Russia and Ukraine have had conflict;  the countries have battled each other on and off since the collapse of the Soviet Union in 1991. One major historical event that affected the Russia-Ukraine relationship was when Russia invaded and took control of the Ukrainian peninsula, Crimea, in 2014. Hence, Russia is worried that if Ukraine joins NATO, they may attempt to take back Crimea. 

How does this conflict affect the economy? While stock prices mainly fluctuate due to changes in supply and demand (an increase in demand will increase the price, and an increase in supply will decrease the price) they’re also greatly influenced by internal and external factors such as changing economic conditions and policies, interest rates, and inflation.

Worldwide economic and political events like the Russia-Ukraine crisis can impact markets heavily and cause uncertainty which can trigger a chain of events in the business world.

No one knows exactly how this crisis will affect the stock market, but we can use past events to make a prediction. For example, the 2003 Iraq War, 1979 Iranian hostage crisis, and the 1962 Cuban Missile crisis averaged a gain of 8.6% on the S&P 500 (however, the index has gained 4,000% since 1980). If you study previous historical events in even further detail, you can see that political events often have a short-term impact on the stock market, but if it avoids causing a recession, then the market will supposedly bounce back (hopefully!).

One thing is for certain, that this political event will reduce confidence and increase uncertainty. The public’s reactions to what the media is showing us are crucial to what happens next for the stock market, as everyone will either buy or sell in order to protect their assets.

One potential worry is the 80,000,000,000 barrels of oil reserves that Russia is in control of. As of recently, the current price for a barrel is the highest in seven years, and could increase even higher. This increased price could have a catastrophic effect on the economy through increased cost of production, increasing prices of everyday items (inflation), lower purchasing power for households, and therefore less spending that potentially causes unemployment. In addition, this crisis will discourage investment and reduce exports as businesses are not producing as much. This hindered investment will lead to low levels of economic growth, and potentially a recession.