Our Interconnected Economy

A few weeks ago, Russian President Vladimir Putin annexed Crimea, thereby incurring a string of economic and political sanctions from the United States and the European Union. As Western leaders emphatically denounced Putin’s blatant breach of international law, many Americans struggled to understand why they should even care. Aside from geopolitical or moral concerns, there are tangible economic implications, even for our small state.

Admittedly, the United States and Ukrainian economies are not directly connected, but tension in Ukraine bears significant impact on the economies of Russia and the European Union. Its ripple effects can be expected to influence the global, U.S., and ultimately Utah economy. While the U.S. and Russia only trade about $40 billion of goods each year (under 0.3 percent of the United States’ GDP), and we trade even less with Ukraine, we are linked to Russia through the EU. Overall, Russia is the European Union’s third-largest trade partner—to the tune of about $500 billion in goods annually. Therefore, the European Union has, to this point, trod more cautiously than the U.S. has in imposing economic sanctions. Since the EU is the U.S.’s fourth-largest trade partner, any negative impact on the EU is certain to yield eventual impact on the U.S., and it could disrupt the global economic recovery.

Utah is already experiencing one short-term effect of the crisis in Ukraine, but not because of sanctions placed on Russia. Currently, Ukraine is a significant global exporter of corn and wheat, and prices for these commodities have risen dramatically based on the concern that Ukrainian exports might cease or be significantly affected by the crisis. Because Utah farmers and ranchers rely on consistency in grain prices, price fluctuations can threaten their viability. For instance, before the crisis, prices for wheat and corn had been decreasing, so many farmers sold future feed contracts earlier this year. As Ukrainian tensions caused prices to jump, farmers and ranchers have been left reeling.

If the European Union were to issue even harsher sanctions than it has to date, Russia might reciprocate by wielding its most prominent economic weapon: natural gas supply. Currently, the EU relies on Russia for approximately 30 percent of its natural gas. If Russia were to decide to shut off or taper this supply, an opportunity for United States energy companies to sell natural gas to European countries may emerge. The U.S. could step forward as a significant source of energy resources for Europe, potentially providing much of the continent with a larger share of the energy resources it needs in the future. However, because 60 percent of Russia’s export-centric economy comes from energy commodities (nearly a quarter of its GDP) this scenario is unlikely to happen. Russia’s economy needs the EU more than the EU’s economy needs Russia—a factor that EU leaders must consider as they address this evolving situation.

While the potential increased demand for natural gas exports would be positive, especially for our region of the country, the net costs of the ratcheted tension could still be substantial. Global stock markets have remained on edge since the inception of the crisis, and further escalation as Russia continues to threaten neighboring lands has the capacity to promulgate further global economic unrest.

As the effects of crisis in the small region of Crimea ripple through world stock markets and impact even small rural farms in Utah, we are reminded of the interconnectedness of the global economy. Conflict in a small region that most Americans couldn’t locate on a map can create real global economic repercussions. President Putin may augment his popularity in Russia by stoking nationalistic flames, but the aggregate impact of sanctions ultimately hurts most everyone —particularly over the long-term. In responding to political exigencies, leaders in the U.S., EU, and Russia must remember that long-term global economic health does not flourish amid sanctions, tariffs, and protectionism; rather, the seeds of prosperity and peace bloom amid free trade and economic engagement.

This post is part of an ongoing series of data-driven commentary on current events. It was originally published in the Zion’s Bank Economic Outlook Newsletter and the Deseret News.