The economic consequences of a Russia-Ukraine war

Oil and gas sanctions aren't a big deal. Financial sanctions might be.

Last week I discussed who would be the winners and losers if Russia pulled back from the brink of war with Ukraine. Today, that question looks like it might no longer be relevant. Russia has recognized the separatist “republics” of Donetsk and Luhansk, which the rest of the world still regards as breakaway provinces of Ukraine (and only half of which is actually held by the separatists). Russian troops are already on the way to help “defend” these “republics”. While the most destructive and extreme scenarios may still fail to materialize, it’s now clear that some kind of Russian invasion is happening.

It’s way too early to tell who will be the winners and losers of this conflict. But we can start to think about some of the economic consequences. War is traditionally a very disruptive event for both financial markets and the real flow of goods, and Russia is the world’s sixth-largest economy (at purchasing power parity), so there’s lots to mull over here.

Of course the biggest effects will probably be felt in Ukraine. But what happens there will be highly dependent on what happens in the war, and in domestic politics. If Putin deposes the government or conquers much of the country, all bets are off. If Ukraine manages to survive with its leadership and territory mostly intact, it needs to rein in oligarchs, improve tax collection, and invest in defense manufacturing in the western regions of the country.

The effects on Russia and the rest of the world, however, are a bit easier to anticipate. The main thing the West does in response to Putin’s aggression will be to place more sanctions on Russia. So let’s think a little bit about what those might do.

The impact of oil and gas sanctions on Russia and the world

Government actions against Russia will generally fall into three categories:

1. Magnitsky sanctions — i.e., sanctions against specific Russian individuals, preventing them from traveling or doing business in the sanctioning countries.

2. Economic sanctions — forbidding various Russian products from being sold in the sanctioning countries.

3. Financial sanctions — forbidding financial institutions from handling Russian government or private debt or other financial assets.