How will Russia's invasion of Ukraine affect world economies and inflation?

While the world was expecting that Putin is bluffing when he sent troops to the borders of Ukraine. Putin did what no one expected. He attacked Ukraine. This is absolutely devasting news to the world, and such news can easily crash the stock market, especially since Russia is one of the leading exports of oil and natural gas.

eu natural gas imports graph by countries, eu

Since 2011, oil prices haven't grown much. In fact, many believed that oil has reached its peak and its not going to grow anymore. especially since the beginning of the pandemic, the world was on lockdown, so the demand for oil dropped to its bare minimum, however in a matter of a day, oil prices have surged to over 100 dollars.Some people don't care but with record inflation rates, rising oil prices mean more inflation. It's not just about rising prices in the gas stations, but the price of oil affects literally everything you buy. For that banana to reach the Walmart beside your house. It takes a long journey for them to be shipped from Ecuador to the US. The containers filled with banans are loaded into tracks and sent across the country.

Rising oil prices mean, now it's more expensive to drive that truck to your closest grocery store. Hence higher price. This is a simple example, but it's easy to see how it applies to everything else you consume. We have already had a huge supply chain problem. It was one of the main factors behind the 7.5 percent inflation rate, and now imagine if we add an oil crisis into it. inflation can rise as much as double digits, which could be catastrophic.The question is, how long will this crisis last?

oil prices per barrel, macrotrends

Russia began gathering troops at the borders of Ukraine since summer 2021. Multiple US officials warned that Russia is preparing for a full-scale invasion but most people didn't take that seriously because the idea of a war in the middle of Europe in 2022 seemed just unreal. But it doesn't matter because it's already happening.The main question is why? why Russia is invading Ukraine?

The answer is actually quite simple. Putin has been in power since 1999. Over the last 22 years, he has mentioned multiple times that the collapse of the soviet union was the biggest geopolitical disaster of the 20th century. Ever since then, he has been planning to restore the soviet borders that include within them Belarus, Baltic countries, and Ukraine together with mostly Turkic central Asian countries.

However, in the world of capitalism, Russia struggled to attract them economically. Capitalism in Russia didn't work as it was intended so former soviet republics turned to the west. The Baltic countries joined nato and integrated with European countries. However, Belarus had a love and hate relationship with Russia. From one side, it's close to Russia since they share a similar culture, almost a similar language. From one other side, it wanted to be independent and closer to the west.

countries joined nato after collapse of soviet union, metro news

Unlike Belarus, Ukraine wanted to become a democratic European country but Russia had a different plan. Russia established its puppet in Ukraine to which Ukrainians disagreed.In 2013, Ukrainian president Yanukovich had a choice to sign a trade deal with either Europe or Russia. Guess what? He signed with Russia since he was funded by Russia.Ukrainians took to the street and ever since Ukraine and Russia have been at war.

Russian first annexed Crimea and started funding separatists in Danbass, which created a lot of instability in Ukraine and For the past 8 years, Russia was waiting for an opportunity to invade the rest of Ukraine. While comparing military powers, Russia is much more powerful. But at the same time, it’s not easy to take over the largest country in Europe even if it's economically or militarily not that strong.

But the pandemic played in Putin's hand. First protests erupted in the neighboring Belarus which forced the Belarussian dictator to turn to Russia for help. Ever since then Russian troops are in Belarus and controlling the country. In fact, the invasion of Ukraine started from Belarus since it's much closer to Kyiv, the capital of Ukraine.

The question is how long will this war last? Russia is expecting a quick and decisive victory. A couple of weeks or a month at best. Ukraine heavily relies on Russian gas and cutting off Ukraine from Russian gas means freezing winter, which could devastate the morale of the military. Ukraine hoped that NATO will be there to help but Biden made it clear that not a single American soldier will step its foot on Ukrainian soil.

However, if the war drags for long that means oil prices will keep rising which means worldwide high inflation. The problem with wars is that it makes the future unpredictable. When the future is unpredictable, investors hold on to their cash which lowers the demand in the market and drags stock prices down.

We have already expected a recession but with rising oil prices, the recession could get worse, much worse. Although the stock market doesn't really reflect the economy, if the economy isn't going to recover, the markets are going to suffer.

The worst-case scenario is stagflation. It's when the fed raises rates and demand slows down while prices will keep rising because of the energy crisis. People will have to spend a bigger chunk of their income on necessities which will further lower demand for other goods.