Economic Commentary

For the past twenty-four months and twenty-four newsletter articles, I have led with COVID-19 related data. The reasoning was that our economic recovery would depend upon our progress at defeating the pandemic created by the COVID-19 virus. This month, while the impact of the virus remains with us, Russia’s invasion of Ukraine has replaced the pandemic on the front page. The economic and geopolitical consequences of the invasion are real and worthy of our attention. History is complicated, and Eastern European history is very complicated. Modern diplomacy and detente is often obliterated by over seven hundred years of conflict, power struggles, invasions, revolutions, geographical realignments, imperialistic intents, famines and outright declared wars. In most cases within Eastern Europe, the resulting wars produced peace treaties and agreements which were unpopular and resented by those who suffered the horrors of the warfare.

A victor’s redrafting of a country’s geographical boundaries didn’t make those boundaries real to the people living there. It didn’t change language, religion, art, music, traditions or cultural identity. For over two hundred years, between 1772 and 1991, the country we now know as Ukraine was occupied and controlled by the Russian Empire and Habsburg Monarchy, which then became a part of the Soviet Union after the revolution of 1917. The collapse of the Soviet Union in 1991 returned independence to Ukraine for twenty-three years until the 2014 Crimea (think eastern and southeastern Ukraine) invasion by Russia, supposedly to rescue Russian-backed dissidents who were trying to overthrow the elected majority governing Ukraine. The civil-war-like history between Crimea and Ukraine includes families divided by political, not religious, preferences — with both Ukraine and Russia fighting to influence the struggle of those caught in the battle for sovereignty.

Enter Vladimir Putin. Dictators consolidate power, squash dissent, control the narrative, control public information, and uniformly abandon human and individual citizen rights by suspending or corrupting democratic elections while they seek to expand geographies they control. Substitute any dictator that you know of throughout history for Vladimir Putin, and you will see identical behaviors. Beyond the fact that Vladimir Putin is a dictator, what is his motivation and expected gain from invading and potentially controlling Ukraine and not just Crimea? Beyond the cynical thoughts of Putin acquiring greater personal wealth through manipulation of natural resources, currency and financial assets, we are left to understand his political vulnerabilities. In the thirty-one years that Ukraine held independence, from 1991 until the invasion this month, they were making significant progress toward becoming a market-based economy and rising on the scale of democratic practices through free elections. Beyond their ascendency to a more democratic and free market economy was their attraction to becoming a member of the European Union and expressed desire to become a member of NATO. This is not a conflict of communism vs. democracy. Putin is not a communist and Russia, where it advantages the political elites and oligarchs, is very much a market-based economy. It very much is, however, a struggle between the European Union legitimacy that Ukraine could gain and the protection it would garner by being a NATO member nation. Putin has expressed many times that he believes the most catastrophic event that ever occurred to Russia was the destruction of the Soviet Union, and the resulting independence of countries on Russia’s border that were previously a part of the Soviet Union. Don’t mistake that his lament is for communism, but rather geography, wealth and resources to combat the European Union economically and militarily to deter what he believes to be the threat of NATO and, by implication, the west.

Russia has not done well in imperialistic struggles. It is early to compare this invasion to Russia’s occupation of Afghanistan; however, it seems a mistake to assume that the Ukrainians are unwilling to fight, and an additional mistake to think that NATO will not deliver arms to Ukraine when needed. Additionally, mid-term elections in the United States are approaching. Republicans seeking to return to power will seek political advantage by criticizing President Biden’s efforts to deter Putin’s actions. The NATO alliance and unification of the European Union in economic sanctions against Russia seem, on the surface, a tough policy to criticize — though, anymore, there seems to be no policy safe from political posturing even if it is nonsensical. Natural resources are always powerful. Russia needs to sell them and Europe needs to buy them. Every negotiation has its own sense of urgency. Controlling the narrative in the social media world we live in is more difficult for dictators than ever before. Body counts of Russian soldiers will be broadcast, photos of destroyed Russian helicopters, fighter jets and tanks will be blasted and tweeted around the clock. The six hundred billion dollar cash reserve that Russia accumulated by selling assets prior to the invasion sounds huge, until it is required to be spent down by sanction-imposed interruptions in commerce. When you build your economy on being a producer and supplier of energy, you must also understand the implications of interrupting the chain of distribution through self-inflicted policies and actions. War is horrendous and man’s inhumanity to man will be on full display in this conflict or, as Putin refers to it, this military exercise. When the sense of urgency intensifies enough, real negotiations will occur and the inhumanity will stop. Let’s hope that we get there quicker rather than later.

The global supply chain is still in disrepair. A war of consequence and long duration will delay the repair of the supply chain further, thereby increasing inflation pressure. Around the margins there are things that can be done to increase our country’s energy supply, but our supply chain of all products is global in nature; our independent actions specific to our country alone are not likely to ease energy-related prices significantly. The Federal Reserve has made their position on credit tightening clear, though that position was made prior to the Russian invasion of Ukraine. Until we see and hear differently from the Fed, we can expect their stance on interest rate hikes to continue; however, we will also expect them to maintain a watchful eye on their full mandate that includes more than just inflation data.

COVID-19 is still here, but as I mentioned last month, we are apparently done with COVID-19. Infection rates as a percentage of population are declining, hospitalizations are declining and outcomes are improving with some notable exceptions. People who are vaccinated and boosted fare the best with lower infection rates, significantly lower hospitalization rates and nearly no mortality. Those unvaccinated with comorbidities continue to suffer devastating effects of being infected. Bloomberg’s global vaccination model now indicates that full immunity globally (75% total vaccination) is still five months away, but for many countries has already occurred. The good news is that the rate of daily global vaccinations has held steady at 28.9 million. The United States will be approaching 70% vaccinated by mid-April.

Restrictions are being lifted, masks are becoming more optional than required and gathering is picking up pace. Opportunities for ranting about restrictions and requirements are diminishing, which will require some to look for other ways to vent their rage. What are the chances it will be replaced by increased civility? Just kidding.

The New York Federal Reserve Weekly Economic Index through February 24 was reported at 6.84%, which is relatively steady from last month, which indicates an annual real GDP growth rate of 5.56%.