Economic Implications of the Russian Invasion

A quick glance at microchips, wheat, and energy.

We’re not especially exposed to the Russian economy. How many of you wear Russian shoes or drive a Russian car? And you can procure your Russian dressing from the likes of Hidden Valley Ranch and Wish-Bone.

We imported about $30 billion in Russian goods and exported about $6 billion of American goods to Russia last year. For context, that’s about 0.4% of total U.S. exports and 1% of U.S. imports. We engage in significantly more trade with Sweden, whose population is about 7% of Russia’s. Russia’s biggest export is oil, and the U.S. bought about 66 million barrels from them in 2021. That’s about 3% of total oil imports, and only modestly more oil than we imported from Colombia. We also don’t depend substantially on Ukraine for inputs, final goods, or sales. So this won’t generate major disruptions for the U.S. economy, right?

Not so fast. Here are 3 factors that are going to hurt the American (and global) economic recovery.

1. Microchips

As of 2019, Russia produces about 41% of the world’s palladium. What’s palladium? It’s a rare metal and about half of it is used to make catalytic converters. It’s also a key component in electronics and dental amalgams. Palladium prices are currently up 48% since December 15th. That’s about 20% lower than the peak seen in May 2021 (microchip shortages have pushed palladium prices higher), but 374% higher than the cyclical low observed in February 2016. Russia and Ukraine collectively account for about 90% of the world’s neon production, another key component in microchip manufacturing.

While manufacturers have been stockpiling inputs, their inventory won’t hold out forever. A prolonged disruption would put a serious squeeze on the production of microchips, which in turn will push prices higher for a range of products that use them, including new and used vehicles.

If you’ve been trying to buy a Play Station 5 since they were released 15 months ago, this isn’t going to make it any easier.

2. Wheat

Russia and Ukraine are the third and seventh greatest producers of wheat, respectively, and they collectively account for more than 13% of global wheat production. Wheat prices surged 20.3% from February 16 to February 24. U.S. food prices increased 7% between January 2021 and January 2022, and they’re going to keep rising like extra-yeasty bread.

3. Energy

According to a report from Copenhagen Economics, only four countries in Europe allow plasma donors to be paid. As a consequence, Europe has to import a significant quantity of plasma from the U.S., where donors can be compensated. What does this have to do with the Russian invasion of Ukraine?

Nothing directly, but prohibiting plasma-donor compensation while buying plasma from a country that doesn’t is the same faulty logic that led Europe to become energy dependent on Russia. EU countries get 46.7% of their solid fuel from Russia, 41.1% of their natural gas, and 26.9% of their crude oil. Part of this dependency has to do with resources drying up, but there’s a strong case to be made that the EU prematurely turned its back on fossil fuels and nuclear energy production, only to turn around and purchase fossil fuels from the cheapest producer, Russia.

Predictably, energy prices have been surging in Europe but have been largely flat here at home.

The Upshot

The market’s rally on this Friday morning (2/25/2022) may be premature. There are a lot of negative ripple effects to consider, and the market may not be pricing those in fully. Stay tuned…

What’s Next

I’ll have my monthly Q&A column for February, available to all paid subscribers, out on Monday. If you’re a free subscriber and want to get the Q&A column (as well as the full Week in Review every Friday), you’re only a click away.