WAR and the ECONOMY

 I have been studying the potential effects of the Russian invasion of Ukraine and the response by the rest of the world on the economy.

Some facts on Russia and its economy –

Russia has a very large supply of certain minerals and natural resources, and they constitute a large percentage of the world’s supply. For example: Russia provides 10% of the world’s petroleum. Of that, they supply 40% of Europe’s natural gas. As a reference, 25% of all energy consumed in Europe is from natural gas.

Russia is the top supplier in the world of grain – mostly wheat, of fertilizer products, and of nickel. Nickel is necessary and critical for production of stainless steel, and of lithium-ion batteries. They are also the top producer of palladium. This rare metal is used in electronics, catalytic converters, and many other industrial uses – like the batteries mentioned above.

Russia is the #2 producer of platinum and aluminum. Both critical construction components in high-tech devices.

They are #3 in coal and steel exports.

They are #4 in steel production

They are #5 in the mining and export of iron ore, and of wood production.

In total Russia provides @17% of the world’s commodities. They have the world’s 11^th largest GDP – 6^th when measured in purchasing power.

 

The sanctions against Russia have isolated it from most of the world and crippled its economy and ability for most world trade. The loss of access to and trade of the above-mentioned commodities and products will impact the entire world. Even if Russia and Ukraine agree to a cease-fire and/or cessation of hostilities, the sanctions are likely to continue, at least for the foreseeable future. Cutting Russian banks off the “normal” world supply of money and monetary transactions also will have a worldwide effect. Cutting Russia off dollar transactions could unintentionally cause issues with the US dollar as the unofficial standard of world trade as Russia works to raise capital by any means. With China very desirous of having its currency becoming the world’s standard, they could assist with this issue. That would have huge consequences on the US economy long-term.

The loss of supply, especially the metals mentioned above, have already caused tremendous spikes and availability problems with nickel, stainless steel, copper, and other metals. Some of these prices are historical highs. This pricing will impact pricing even more in an economy that is absorbing the highest inflation in modern memory. (a side-note – comparing today’s inflation with the 1980s is not truly possible as the formula for calculating inflation has changed multiple times since – using the 1980s method of computing inflation shows today’s figure much, much higher)

 The metals and minerals that are supplied in large part by Russia (and Ukraine coincidentally) are used widely in the new “green technologies” – battery production has been mentioned, but also in electric motors, wind turbines, solar cells, etc. The loss of a great supply of petroleum will be harder to make up with this problem occurring at the same time. This will lead to price increases in energy as well as potential shortages of supply.

In my industry of major appliances, steel shortages are already playing a part. Stainless steel has been a bit more available. With the raw materials for stainless steel being largely provided by Russia and the area affected, stainless steel may also become an issue. It most definitely will increase in price. Chips and circuit boards will continue to be tight. This would be somewhat due to raw materials and from chips being diverted to military use. Again, even if the active fighting stops today, Russia will want to replace all the “smart” weapons they have used, and NATO and others will want to ramp up production. With an almost unlimited budget, military contracts normally get filled prior to commercial/consumer ones. This is also true of a lot of other electrical/electronic parts that have uses in military and consumer goods.

Pressure on household economies and spending will be great from inflation and macro-economic issues caused by the factors of supply and energy discussed above. The loss of consumer confidence over the past two or three months has only been accelerated by the Russian/Ukrainian conflict. This also does not bode well for retail sales of any products, especially non-essential ones. The benefit of our industry is that a lot of the products are essential and if possible, they will be replaced. It may not be with the latest and greatest, but they will be purchased. This could bode well for companies that fit into the “meat” of the market quite well. True luxury brands too should do well, as those in the top wealth tiers will continue to have money. What will suffer is the “better” goods, if history is an indication. GE branded and Hotpoint appliances will outsell Profile for example – in this scenario.