Russia’s invasion of Ukraine has added new hurdles for already dysfunctional global supply chains and prompted a slew of economic sanctions with potential repercussions for consumers and producers in many countries.
What are the likely economic consequences of the war and the responses to it by the international community? Chicago Booth’s Initiative on Global Markets invited its US and European panels of economic experts to express their views on the potential fallout for the Russian economy, the European economy, the US dollar’s role as an international currency, and global growth and inflation.
On the first statement, about whether the fallout from the invasion will both reduce global growth and raise global inflation over the next year, nearly 80 percent of the panelists agreed, and the rest were uncertain.
Among the short comments that the experts are able to include in their responses, Karl Whelan of University College Dublin, who strongly agreed, said, “This is a classic negative supply shock. As we know from the 1970s, these shocks raise inflation and reduce output.” Robert Shimer of the University of Chicago, who said he was uncertain, accepted the diagnosis but not necessarily the outcome: “It’s an adverse supply shock. Whether that is inflationary depends on the monetary policy response.” Larry Samuelson of Yale, who agreed with the statement, commented, “A protracted conflict, on top of existing supply-chain woes, will be detrimental to the world economy.”
Others who agreed pointed to the likely drivers of lower growth and higher inflation. Christopher Pissarides of the London School of Economics (LSE) explained, “The effect will be through oil and other resources. Supply will be reduced so prices and production costs will rise.” Franklin Allen of Imperial College London noted, “The invasion is affecting inflation already with oil, gas, and many other commodities reaching high levels. Output may also fall.” Markus Brunnermeier of Princeton added, “Russian economy is not large, but the increase in energy prices will have adverse effects on several emerging markets and the European Union.” And Anil Kashyap of Chicago Booth mentioned, “Lots of disruptions, energy, neon, palladium (both important for chips), wheat.”
Among those who said that they were uncertain, Antoinette Schoar of MIT remarked, “There will surely be large economic repercussions, but I am not entirely sure that it will be stagflation.” Olivier Blanchard of the Peterson Institute stated, “I am reasonably confident about inflation, but less sure about output. Demand may be strong for other reasons.” And Eric Maskin of Harvard observed, “Stagflation seems a plausible outcome, but I wouldn’t want to make a point prediction that it will happen.”
Others who were uncertain explained why. Kjetil Storesletten of the University of Oslo replied, “Russian inflation will reduce world growth. Unclear what it will do to inflation.” And Jan-Pieter Krahnen of Goethe University Frankfurt commented, “Consequences of the war go both ways: supply chain and energy prices lower growth; energy substitution and military buildup do the opposite.”
On the second statement, about whether the sanctions implemented to date will lead to a deep recession in Russia, more than 90 percent of the panelists agreed, and again none disagreed.
Comments from those who agreed included those from Larry Samuelson, who said, “One already sees signs of disruption, though it is less clear that the effect will be a deep recession.” Karl Whelan noted, “Russia runs a large non-energy current account deficit. Loss of access to supplies and services will hurt the economy.” Jan-Pieter Krahnen suggested, “While I expect to see a recession because of global pull out from Russia, there are also some counter effects from rising energy revenues.” Franklin Allen added, “There is uncertainty about how effective sanctions will be and how much China will help avoid them. But it seems likely output will fall.”
Some panelists who agreed noted the significance of the coverage of sanctions and the length of time that they may be in place. Kenneth Judd of Stanford declared, “Yes, IF we maintain them. We cannot retreat. We must maintain this united squeeze on Putin.” Daron Acemoglu of MIT said, “Yes, but recall that they are not fully comprehensive (yet). The West should halt all gas imports and exclude all Russian banks from Swift.” Christopher Udry of Northwestern added, “But stronger sanctions are still available and should be implemented.”
Among those who said they were uncertain, Markus Brunnermeier noted, “Growth was already low beforehand in Russia. Sanctions will take time to work.” Patrick Honohan of Trinity College Dublin stated, “Gas/oil exports can still pay for Russia’s imports. Recession more likely to be driven by collapse of domestic confidence.” Christopher Pissarides said, “For as long as Russia can sell its oil it will have the revenue. It can then trade with Asia. But switching markets will be costly.” And Robert Hall of Stanford observed, “Imposing autarky does not necessarily lower activity.”
On the third statement, about whether a total ban on oil and gas imports risks recession in European economies, 70 percent agreed, and most of the rest were uncertain. It is worth noting that there were considerably stronger expectations of a recession among the European panel. At the same time, several panelists expressed the view that even if an energy embargo were to be costly for Europe’s economies, it may still be desirable to implement one.
Among those who agreed or strongly agreed, Luigi Guiso of the Einaudi Institute for Economics and Finance noted, “Europe is heavily dependent on Russian gas, substituting it takes substantial time.” Christopher Pissarides concurred: “Germany is totally dependent on them. A recession in it and some others will bring recession to Europe.” Similarly, Lubos Pastor of Chicago Booth pointed out that: “Several large European economies, including Italy and Germany, are highly dependent on Russian gas.” And Jose Scheinkman of Columbia explained, “Recessionary effect will come mostly from banning gas imports, since the effect from oil will be partially diluted by reshuffling supplies.”
Others who agreed about the costs to Europe of an embargo recognized that one may still be warranted. Jan-Pieter Krahnen argued, “Unfortunately, yes. I would nevertheless advocate closing Nord Stream 1, the existing gas pipeline, and to substitute via renewables.” Barry Eichengreen of the University of California at Berkeley said, “Note that this is not necessarily an argument against such a ban.” And Ricardo Reis of the London School of Economics concluded, “But it is worth it.”
Some of those who were uncertain took a similar line. Christian Leuz of Chicago Booth stated, “Possible but hard to know. It should still be considered for political and humanitarian reasons. It might be a price worth paying.” And Anil Kashyap commented, “Probably? But doubt we won’t try, and hard to gauge how much substitution is possible. Continued purchases are helping with foreign exchange for Russia.”
Others who were uncertain acknowledged the downsides but were not sure that they will lead to recession in Europe. Daron Acemoglu said, “Of course, it will be more costly for Europe, but not clear whether it will push them into severe recession.” Jean-Pierre Danthine of the Paris School of Economics suggested, “Would clearly lead to a slowdown, possibly recession in some more dependent economies.” And Karl Whelan responded, “Unsure. It is a negative factor but the recovery from the pandemic has been strong and household balance sheets are in good shape.”
Still others commented on potential shifts in the global energy market. Franklin Allen said, “Difficult to say at this stage as it may simply be that total supply remains the same and which countries supply Europe changes.” And Kenneth Judd argued that: “We need to get OPEC to increase supplies and change some US policies to increase flow of oil to Europe.”
Jan Eeckhout of Universitat Pompeu Fabra Barcelona disagreed with the statement, noting: “There will be transition, but eventually Russian oil/gas will be consumed somewhere (China, India…) if not in Europe.”
On the fourth statement, about whether weaponizing dollar finance is likely to lead to a significant shift away from the dollar as the dominant international currency, reactions were much more mixed than on any of the other questions. Overall, across both panels, 24 percent agreed, 36 percent were uncertain, 36 percent disagreed, and 5 percent strongly disagreed.
Among those who agreed, Jan-Pieter Krahnen said, “This shift away from the dollar is under way already, as weaponizing of finance has become an element in international politics for years.” Robert Shimer remarked, “More true for countries like Russia and China that may fear future sanctions.” And Christopher Udry made a comment similar to those about an energy embargo being costly for Europe but nevertheless worthwhile: “Although I am not sure about the ‘significant.’ In any case, a price that is worth paying.”
Others who agreed suggested potential alternatives to the dollar. Darrell Duffie of Stanford commented, “With weaponization of dollar payments, workarounds would move moderately toward cryptocurrencies and other payment arrangements.” Lubos Pastor added, “Gold, crypto, and renminbi are likely to gain market share at the expense of western currencies such as the dollar.” Jose Scheinkman cautioned, “But since measures also involved the euro, the yen, sterling, and the Swiss franc, countries planning to invade democracies would be restricted to gold, crypto, or renminbi.”
Among those who said they were uncertain, Maurice Obstfeld of the University of California at Berkeley commented, “Not if it is only in cases like Russia now.” Franklin Allen explained, “Maybe in the long run the role of the dollar will fall, but in the short to medium term network externalities may dominate.” Jean-Pierre Danthine stated, “The dollar will remain the (somewhat less) dominant international currency.” And Abhijit Banerjee of MIT argued that: “All the forces that could lead to a move away from the dollar were already there. But maybe this could act as a sunspot.”
Several panelists who disagreed that the dollar will be diminished in status point to the size of Russia’s economy. Kjetil Storesletten said, “While Russia might try to rely less on dollars, the dollar’s dominant role will remain. Russia is too small.” Pol Antras of Harvard concurred: “Russia’s economy is small. Need to see China’s ultimate reaction, though.” And Peter Klenow of Stanford linked to recent data on the Russian share of world GDP and trade: 1-2 percent.
Others who disagreed drew attention to the absence of realistic alternatives to the dollar, some focusing specifically on China and its currency. Charles Wyplosz of the Graduate Institute, Geneva, asked, “Away from the dollar into what? Not renminbi, which is not really fully convertible.” Daron Acemoglu added, “What’s the alternative? Renminbi? It can be argued that China has ruined its international standing with its full-throated support for Russia.” Patrick Honohan noted, “This is not the first time dollar has been weaponized. And financial sanctions are not just by the US. The renminbi still has a long way to go.” Kenneth Judd argued that: “This use of dollar power is supported by all our friends. It would be difficult for China to end its use of the dollar.”
Finally, some panelists were doubtful about the prospects for any alternatives. Anil Kashyap commented, “Highly unlikely in the short run, and the dollar remains ‘the cleanest dirty shirt.’ What is the alternative? Doubt it will be crypto!” Ricardo Reis of LSE directed us to his research showing that: “It is hard to jumpstart alternatives, and then to make them grow.” And Richard Portes of London Business School concluded emphatically: “No serious alternative.”
All comments made by the experts are in the full survey results for the US and European panels.
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