As the war between Russia and Ukraine continues, I’m worried about the U.S. entering the war. And if that happens, how does war impact the economy and how can I protect my money in case of war?
While we all hope the war comes to an end soon, the reality is that when major countries are at war it does impact the global economy. Let’s review how the Russian, Ukraine war impacts the U.S. economy, our banking system, and steps you can take to protect your assets.
How does war affect American banking?
As you have seen in the news, the U.S. Treasury Department has banned all financial institutions in the U.S. from opening or maintaining correspondent banking accounts for Russia’s largest bank (Sberbank) and its subsidiaries. This effectively means this Russian bank is cut off from the U.S. financial system. This directive is part of a group of sanctions the Biden administration has placed on the Russian state-owned VTB Bank, and new debt and equity restrictions on more than a dozen Russian entities. All assets held by the blacklisted companies and institutions are now frozen, and U.S.-based individuals and companies can only conduct business with them if they receive exclusive permission from the U.S. Treasury Department.
However, despite these sanctions, most U.S. banks and credit unions will continue to operate in a regular capacity throughout this time. Financial institutions have compliance officers on staff to ensure all federal laws, including wartime sanctions like these, are followed completely and without interrupting ongoing service. In addition, the financial service industry has experience dealing with similar sanctions from Russia’s annexation of Crimea in 2014, and more recently, sanctions related to China and Venezuela. Patriot Federal Credit Union continues to provide the highest level of personalized and professional member service that you’ve come to expect, despite the war in Ukraine.
Unfortunately, we have already begun feeling the effects of war on a challenged economy. You surely have experienced a spike in prices at the pump. In many areas of the country prices have already risen above $5 and even higher in California. This increase is a direct result of the many severe sanctions that have been placed on Russia by the U.S. and the European Union, which impact Russia’s ability to sell crude oil. The price for this crucial component of gas has consequently been on the rise.
Yet another factor causing prices to soar is air travel, as Russia has closed its airspace to dozens of countries. This means the blocked countries must divert shipping planes to routes that are lengthier and more expensive. The extra cost of shipping, of course, gets passed on to consumers.
How does war affect the economy?
Various wars in our country’s history have had an inflationary effect on the economy. During the Civil War, this was caused by the Confederacy printing money to pay its soldiers. During WWII, the U.S. economy was running at almost full capacity with high levels of government spending. These factors, along with a shortage of workers, led to wartime inflation. In addition, the shortage of goods and services, which is common during war, as well as a shortage on raw materials like crude oil, also trigger inflation.
Unfortunately, we have already begun feeling the effects of war on a challenged economy. You may surely have experienced a spike in prices at the pump. In some areas of the country, like San Francisco, prices had already hit an all-time high of $5 in the beginning of March. This increase is a direct result of the many severe sanctions that have been placed on Russia by the U.S. and the European Union, which impact Russia’s ability to sell crude oil. The price for this crucial component of gas has consequently skyrocketed.
Beyond the pump, prices on goods, like grains and metals, are also rising due to increased fuel costs as well as worries about possible future shortages. Russia and Ukraine are also major exporters of wheat and corn, as well as essential metals like palladium, aluminum and nickel, which are used in a wide range of products from mobile phones to automobiles. An interruption in the supply of these goods due to war automatically leads to an increase in prices.
Yet another factor causing prices to soar is air transport. As of March 7, 2022, Russia has closed its airspace to 36 countries. This means each of these countries must divert shipping planes to routes that are lengthier and more expensive. The extra cost of shipping, of course, gets passed on to consumers.
How can I protect myself during this war time situation?
The stock market has already taken a hit from the war, and many Americans are fearful that the war may spread and/or further impact the economy. Of course, you should always seek guidance from a qualified financial planner, as you manage your financial assets. But a good rule of thumb has always been, diversify your investment portfolio and stay informed by following the news, current events, and do your research before making any investment decision.