Key takeaways

  • The war in Ukraine, the most significant military event in Europe since World War II, appears nowhere near an end.

  • With the conflict well into its second year, it continues to send ripples throughout the global economy.

  • While no longer a dominant consideration for capital markets, the war does present modest investment risk factors.

A war that began in February 2022 with Russia’s invasion of Ukraine continues with few signs of an end in sight. Along with the human toll the conflict has inflicted on both sides, there are global economic consequences as well.

The U.S. and other countries have imposed substantial economic sanctions on Russia, and many western companies pulled operations out of Russia since the start of the war, while potential supply disruptions continue to pose threats to the global energy and agriculture markets.

The conflict has forced government policymakers, central bankers and corporate leaders to contend with a unique variable on a scale not experienced in decades. The impact on capital markets has been more limited, however, despite the extended duration of the war.

An ongoing conflict

Russia and Ukraine are mired in a now drawn-out struggle. After initial successes, Russia’s army encountered notable resistance in its effort to overtake major portions of Ukraine. By contrast, Ukraine’s military steadily reclaimed some territory previously controlled by Russian troops. Most of the fighting is centered in eastern Ukraine. “Russia is struggling harder and harder against the backdrop of a supreme leader [Putin] who is bound and determined in his objective of taking military control over Ukraine,” says David Bridges, senior geopolitical and security advisor at Fidelity Management and Research Company. Bridges, who had a 25-year career as an operations officer at the CIA, including significant time in the former Soviet Union and Eastern Europe, says Putin may have deceived himself about the level of effort that was required to potentially claim that victory.

“Putin went into the war convinced that he can prevail, and that all he needs to do is push harder,” says Bridges. In the meantime, western nations including the U.S., continue to provide significant military equipment to support Ukraine’s efforts. To this point, there is little sign that either side is prepared to back down.

Geopolitical implications

The nations of the NATO alliance are holding firm in their support of Ukraine. One result of Russia’s aggressive stance toward Ukraine is an expansion of NATO membership. Finland, which shares an 830-mile border with Russia, was accepted as part of the alliance earlier in 2023. Sweden’s addition to NATO is pending approval from all existing NATO members. Along with military equipment to support Ukraine, western nations continue to apply severe economic sanctions on Russia.

NATO’s European Footprint
(Lightly-shaded countries are NATO members)

Map showing NATO's European footprint

Source: North Atlantic Treaty Organization. The U.S. and Canada are also NATO members.

“We’ve seen a uniting of nations that may have had a cooler relationship before,” says Kevin MacMillan, head of state and federal government relations at U.S. Bank. “NATO leaders moved forward with a united view of the conflict.” Cohesion among western nations carried through in the implementation of economic sanctions and related punitive measures against Russia.

While NATO countries have generally remained steadfast in their support, they have avoided sending troops to participate in the military engagement. The U.S. and other NATO countries have, to this point, limited their military involvement to providing weapons, materiel and logistical support.

Bridges believes Russia’s invasion of Ukraine could represent a new era, or second Cold War, that will differ distinctly from the previous three decades. In the new environment, economic weapons, much like those being imposed on Russia today, may be a primary form of combat, as both sides seek to avoid actual military conflict between the U.S. and Russia.1

Assessing the economic fallout

Given the inter-connected relationship among economies across the globe, concerns about the economic fallout on the worldwide economy persist. Energy is a key part of the equation, given that Russia provides approximately 10% of the world’s oil output. Russia, in coordination with the Organization of Petroleum Exporting Countries (OPEC)+, had already implemented supply cuts. Russia pledged additional cuts in July 2023.2

“If Europe’s economy slows, it will certainly have a negative impact on business activity in that region and for American companies doing business in Europe.”

Tom Hainlin, national investment strategist at U.S. Bank Wealth Management

The impact is significant for Europe. For example, prior to the war, Russia supplied about one-third of European natural gas and about one-quarter of its crude oil imports.3

“Europe benefited from a mild winter in 2022-23 that helped to moderate energy demand” says Rob Haworth, senior investment strategy director at U.S. Bank Wealth Management. “Nevertheless, the war is clearly contributing to economic challenges facing Europe today.”

Oil prices soared in the months immediately following the start of the war, but prices retreated in response to weaker-than-anticipated global demand. Nevertheless, it seems likely that oil prices remain subject to volatility in the near term. “Despite the challenges, Europe seems to be filling its energy inventories at a reasonable rate,” says Haworth.

Both Russia and Ukraine are major suppliers of wheat and other agricultural products to various parts of the world. This contributed to a rise in commodity prices that was felt worldwide, along with potential food shortages, particularly in developing countries. An agreement brokered by Turkey and the United Nations in July 2022 ended a restriction on Black Sea shipping of Ukrainian-produced commodities, which helped ease price pressures and offset potential food shortages. However, Russia pulled out of the agreement in July 2023. Ukraine still has the ability to ship grains through land borders and Danube River ports. However, this is likely to drive up transportation costs.4 In light of Russia’s announcement, wheat futures contract prices moved higher in mid-July 2023, but remain below levels reached in the immediate aftermath of the war’s start.

Source: Price represents value of 5,000 bushels of wheat, traded on Chicago Board of Trade.

“In the U.S., we’re a bit more insulated from the economic fallout from the war compared to Europe and other parts of the world,” says Tom Hainlin, national investment strategist for U.S. Bank. Yet he points out that there is a greater risk for multinational companies. “If Europe’s economy slows, it will certainly have a negative impact on business activity in that region and for American companies doing business in Europe.”

Investment considerations in a period of uncertainty

From an investment perspective, the conflict in Ukraine has been overshadowed by other developments, such as ongoing concerns over inflation, the major shift in monetary policy by the Federal Reserve, and more recently, the surprising resilience of the U.S. economy. “The Russo-Ukraine war is more of a ‘tail-risk’ event,” says Hainlin. “If the situation escalates, this would clearly present a negative event risk that could have a detrimental impact on markets, at least on the margins.”

Haworth says the war remains one of the variables clouding the investment outlook for 2023, along with Fed rate hikes, persistent inflation and concerns surrounding the potential for the economy to slow. “Markets are in a position where investors are waiting to see how events and economic data unfold before setting on a more sustained course in either direction,” says Haworth. He recommends that investors maintain a more defensive approach as they position their portfolios.

Be sure to talk to your financial professional about what steps may be most appropriate for your circumstances.

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  1. Lee, Nathanial, “The second Cold War is already beginning, experts say, and many of the battles are being fought with economic weapons,”, March 25, 2022. 

  2. Reuters, “Exclusive: Russia sets plans for oil export cuts in August, sources say,” July 14, 2023.

  3. McBride, James, “Russia’s Energy Role in Europe: What’s at Stake With the Ukraine Crisis,” Council on Foreign Relations, Feb. 22, 2022.

  4. Iordache, Roxandra, “Russia axes landmark Ukraine grain deal just hours before deadline,”, July 17, 2023.

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