'Limited' Effects on U.S. Economy of Ukraine Conflict: Goldman Sachs

Trade links weak, U.S. energy prices less sensitive to Russia than in Europe

The Russia-Ukraine conflicts poses "limited" direct effects to the U.S. economy, according to a Feb. 23, 2022, report from the economics research unit at The Goldman Sachs Group, Inc. (GS). Their reasoning is that trade links between the U.S. and the warring nations are weak and that energy prices are likely to be affected far less in the U.S. than in Europe.

Meanwhile, the conflict has pushed the Federal Reserve's Geopolitical Risk Index to a very high level. The report notes that Fed officials historically have preferred to delay major policy decisions until uncertainties created by geopolitical risks have subsided. However, the current situation differs from past scenarios when the Fed either delayed tightening or even cut the federal funds rate. This time, inflation risk has created "a stronger and more urgent reason for the Fed to tighten today" than existed during past geopolitical crises.

Key Takeaways

  • The Russia-Ukraine conflict poses "limited" direct effects to the U.S. economy but higher risks for Europe, per Goldman Sachs.
  • Russia and Ukraine are small trade partners, and the U.S. is a net exporter of natural gas.
  • The most unpredictable economic fallout from the conflict is its potential to create tighter financial conditions and higher business uncertainty.
  • Given existing inflationary pressures, the Fed is likely to continue with its plan to hike interest rates in stages during 2022.

Impact of Oil Prices on Inflation and GDP

Goldman's economists estimate that a $10-per-barrel increase in the price of oil raises U.S. core inflation by 3.5 basis points (bps) and headline inflation by 20 bps, while it lowers the growth rate of gross domestic product (GDP) by slightly under 10 bps. The reduction in GDP growth can be larger if geopolitical risk "tightens financial conditions materially and increases uncertainty for businesses."

Impact of Russia-Ukraine Conflict on Fed Policy

Given some signs that a problematic wage-price spiral might be emerging, and given that near-term inflation expectations are already high, the report observes that "further increases in commodity prices might be more worrisome than usual." Therefore, the authors expect that the Federal Open Market Committee (FOMC) will continue to increase interest rates steadily by increments of 25 bps at its upcoming meetings.

However, the authors also believe that geopolitical uncertainty has decreased the odds that a 50 bp hike will be announced in March. As of Feb. 23, 2022, the Fed's Geopolitical Risk Index (GPR) reached its highest level since the Iraq War of 2003.

Three Channels of Economic Impacts

Goldman sees three "channels" of economic impacts from the Russia-Ukraine conflict: disruptions to trade, higher energy prices, and tighter financial conditions. These channels are relevant for both the U.S. and Europe, but the effects are likely to be smaller in the U.S.

Given that Russia and Ukraine combined account for far below 1% of U.S. imports and exports, the trade impacts in the U.S. should be very small.

The impact on energy prices in the U.S. also should be limited. Europe imports much of its natural gas from Russia, but the U.S. is a net exporter, and any spillover effects on U.S. gas prices should be "modest." Meanwhile, Goldman's commodities strategists expect only a "modest" impact on oil prices, but the risks are skewed to the upside since the oil market is already tight. They also note that any boost to domestic energy production from rising prices should be weaker than in the previous cycle since investment in shale oil production has become less sensitive to price increases.

The report warns that the impact of the conflict through tighter financial conditions is the most unpredictable. Past geopolitical risk events rarely have been followed by a significant tightening in U.S. financial conditions, but the authors caution that history may not be relevant to the current situation. Should financial conditions tighten and the level of uncertainty facing businesses increase, U.S. economic growth would be dampened.

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  1. Goldman Sachs Economics Research. "US Daily: Implications of the Russia-Ukraine Tensions for the US Economy and Fed Policy (Briggs/Mericle), Feb. 23, 2022."

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