By James Pethokoukis

While Russia is no economic heavyweight, it’s hardly an unimportant economic player. Not only does Russia have the world’s 11th largest economy (for the moment), it’s a massive global producer of oil and gas, as well as most industrial metals. In particular, Europe’s dependence on its energy exports means sanctions can have tremendous implications for the EU and global economy. But there’s more to the economic story.

Then there’s the impact of all the geopolitical and economic uncertainty that the brutal attack is generating. “High geopolitical risk leads to a decline in real activity, lower stock returns, and movements in capital flows away from emerging economies and towards advanced economies,” write Dario Caldara and Matteo Iacoviello in a 2018 Federal Reserve paper. Using newspaper articles to index geopolitical risk, the economists identified a spike associated with the 2014 annexation of Crimea by Putin’s Russia.

As seen in the below chart from Goldman Sachs, Russia’s latest aggression toward Ukraine has caused a sharp rise in geopolitical risk:

In a 2016 paper, “Measuring Economic Policy Uncertainty,” economists Scott R. Baker, Nicholas Bloom, and Steven J. Davis used a similar index to conclude that economic policy uncertainty “is associated with greater stock price volatility and reduced investment and employment in policy-sensitive sectors like defense, healthcare, finance and infrastructure construction.” Looking at the economy in macro, the researchers found that “innovations in policy uncertainty foreshadow declines in investment, output, and employment.” So beyond the specific effects of military conflict, economic sanctions, or supply shocks in energy, the uncertainty about it all is cause for concern.

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