Everyone said his war would destroy Russia’s economy but he’s killing America’s too

Between a booming stock market, runaway inflation and growing fears of recession, Americans are looking to the economy.

And somewhere, Vladimir Putin probably smiles about it.

Amid all this chaos, inflation has become almost every American’s biggest financial concern as prices rise for everything from gas to groceries.

There are several reasons why inflation hit a 40-year high of 8.6% last month, including rising rents and labor costs. But economists say a key driver is Russia’s invasion of Ukraine and the subsequent commodity disruption it has caused.

“The Russian invasion and soaring oil and other commodity prices are the No. 1 reason, followed by the pandemic and the housing shortage,” wrote Mark Zandi, chief economist at Moody’s Analytics, in a recent Twitter thread.

The February invasion immediately shook the global economy and plunged international markets into uncertainty. Some commodities have been particularly volatile, notably oil and foodstuffs, due to limited supply from Ukraine and Russia.

In response to the invasion, Western powers unleashed a series of crippling sanctions against the Russian economy. Hundreds of international companies left the country and Russia’s subsequent isolation led to a 3.5% loss in GDP in the first quarter.

But even as the Russian economy suffers, President Vladimir Putin continues to dictate global energy and food prices. Western sanctions are also beginning to hurt the United States and the rest of the world due to recent energy price spikes that have caused factory shutdowns and slowing growth in the United States and Europe, proving that Russia has more weight than Western leaders thought.

If the war drags on, global financial institutions, including the World Bank, say it could have even more serious consequences for the US economy. And pundits have begun to sound the alarm about another financial threat not seen in decades: stagflation, a toxic combination of high inflation and slow growth.

“Amid the war in Ukraine, soaring inflation and rising interest rates, global economic growth is set to collapse in 2022,” World Bank President David Malpass recently wrote. , in the institution’s latest economic forecast.

The war will likely lead to “several years of above-average inflation and below-average growth,” Malpass added. “It’s a phenomenon – stagflation – that the world hasn’t seen since the 1970s.”

The threat of stagflation

Stagflation occurs when growth slows significantly, but inflation and high prices continue to weigh on the economy.

The United States hasn’t really experienced stagflation since the 1970s, when that decade’s high oil prices simultaneously led to slower growth, high unemployment, and persistently high prices. Circumstances today are different from those of the 1970s, but a prolonged war in Europe would lead to very similar risks.

The war has created major supply shortages of energy, food and critical raw materials, including metals, exacerbated by existing supply chain issues related to the COVID-19 pandemic and subsequent lockdowns in major Chinese manufacturing centers.

Supply shortages and soaring energy prices caused by the war had already begun to force European factories to close. Manufacturing and industrial production in the United States is also starting to show signs of slowing growth.

Weaker industrial production could signal that a recession is approaching, as many economists predict. But with high fuel prices continuing to be a driving force behind high prices, it’s the perfect combo for stagflation.

Putin’s retaliation

Since the start of the war, a wave of Western sanctions has hit the Russian economy, which preceded the departure of hundreds of foreign companies and largely cut the country off from the global economy. But while the sanctions have been brutal for the average Russian citizen, with Russia’s inflation rate already at 20%, the country’s huge oil and gas sector continues to play an important role in global energy markets – and will likely continue to do so for some time.

The European Union has pledged to reduce its dependence on Russian oil imports by 90% before the end of the year. But the continent still buys more than half of all Russian oil exports, and it may be some time before the West is able to completely wean itself off Russian fossil fuels.

And even if Europe is able to reduce its dependence on Russia, the country is still pursuing lucrative energy deals with China and India. Limited global supply also means oil prices are likely to remain high, which will be a boon for Russian oil companies.

“In terms of the rejection of our energy resources, this is unlikely in the next few years,” Putin said during a meeting with young entrepreneurs this week. And the Russian president may be right, as a recent analysis by Bloomberg predicts that Russian oil and gas revenues will reach $285 billion in 2022, 20% more than last year’s windfall.

With Russia more financially stable than many in the West had hoped, Putin was not afraid to turn off the gas tap to Europe. This week alone, Russia has tightened gas flows and boosted European prices by 24%, an act some experts have called “politically motivated”.

As long as Putin has this much control over energy prices, the West will be afraid of a limited energy supply. And with fuel prices being a major driver of inflation in the United States, Putin’s actions could lead to an extended period of high prices.

In the World Bank report, Malpass warned that the key to avoiding stagflation is to increase fuel production to reduce prices and help manage inflation. But with Putin seemingly ready to cut gas flows and drive up costs, keeping prices in check may be easier said than done.

Even if the invasion of Ukraine does not go as planned for him, Putin can still be reassured that the war is causing severe economic distress in the West.

This story was originally featured on Fortune.com

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