Russia, Ukraine and China: Economic Realities and Dangers Ahead
There are several critical issues facing the United States today. These include the labor shortage and skills deficit, the disruption of supply chains, the new direction of globalization, fear of new COVID variants, and inflation, which is made worse by all these issues.
In addition, there are many serious concerns caused by the Russia-Ukraine war and the fallout of China continuing to support Russia.
Russia is the world’s fourth-largest wheat producer; Ukraine is fifth. Combined, they account for about 30% of global wheat exports, as well as 25% of fertilizer and 16% of corn exports, according to the OECD. The projected disruption of a poor Ukrainian harvest and the impact of Western country boycotts of Russian agricultural goods already has elevated global prices.
The impact on the United States, which is the breadbasket of the world, is minimal. However, for countries in the Middle East and Africa that have large poor populations and are highly dependent on agricultural exports from Russia and Ukraine, the rise in prices will not only increase hunger, but could spark civil unrest. Egypt, which imports 85% of its wheat from Russia and Ukraine, is a country that comes to mind. American farmers could help by boosting exports.
As for disruptions in the flow of oil and natural gas from Russia, again, the United States is minimally impacted. In recent years, the U.S. has been the world’s top producer of both natural gas and oil. Russia is typically second, sometimes competing with Saudi Arabia for that position.
In 2021, Russia supplied only 7.9% of U.S. imports of oil and refined petroleum products, says the U.S. Energy Information Agency. And a primary reason for that has to do with transportation charges.
When you factor in the high cost of shipping the type of oil used in American East and West Coast refineries from the Gulf port, Russian oil is cheaper. Nevertheless, the Biden administration’s banning of Russian oil will have little impact on the United States.
On the other hand, Russia supplies about 25% of European oil and 40% of its natural gas. And some countries, like Germany, have much higher dependencies. No one wants European petrodollars supporting the Russian military agenda. But immediately turning off the pump is not possible, at least until other sources of supply are secured — and that brings up another concern.
One would assume that with America’s large reserves of oil and natural gas, boosting production, especially when prices are high, would be a no-brainer for the U.S. energy industry. But because many producers have been hurt by big downward price swings and are not sure where prices will go from here, a large number of companies are taking a wait-and-see attitude and not increasing investments or output. Many are hoping that, sooner rather than later, they get pumping.
From an economic point of view, China, not Russia, is a much bigger concern. Even though Russia has targeted civilians in Ukraine, China is still likely to support Russia for one very important reason: it wants secure and inexpensive access to Russian energy supplies and agricultural goods that will be cheaper due to boycotts from much of the Western world.
If China doesn’t get this, it may have a big problem. Average Chinese income is small, and a fraction of America’s average. The last thing Chinese President Xi Jinping wants are higher energy and food prices that further slow its economy and create angry Chinese consumers — a situation that could lead to civil unrest.
For the last several years, U.S.-Chinese tensions have been high. Chinese continued support for Russia has compounded this and is likely to accelerate the effort to decouple the American and Chinese economies.
This less-than-optimal scenario could evolve into two main camps, one involving the United States and its close allies, and the other involving China, Russia, and their few friends. A third group likely would emerge to include non-aligned countries or those attempting to remain neutral.
According to the U.S. Chamber of Commerce, a full decoupling would lead to tremendous output losses for strategic U.S. industries, weakening their ability to sustain U.S. jobs, R&D, and global technology leadership. On the other hand, a partial decoupling that includes sensitive technology sectors would still have a considerable, but less severe impact on the United States.
Nevertheless, for companies that source from China, export to China, or operate there, it’s essential to re-evaluate their position and take a very cautious approach.