What a Russian invasion of Ukraine would mean for the global economy

Russia announced a partial pullback in Ukraine today, but the crisis is far from over.

Why it matters: If there was a Russian invasion, there would not only be geopolitical shockwaves and human tragedy, but it also could upend markets and strain the global economy.

• The largest country on earth by land mass, Russia is a commodities giant, ranking as a top producer of natural gas, oil, nickel, palladium, copper, coal, potash, wheat and more.
• Disruptions to Russian exports — either at Russian President Vladimir Putin's say-so or due to sanctions — would drive up commodity costs, adding to global inflationary pressures and supply chain disarray.

State of play: Russia is the largest supplier of natural gas and crude to the European Union.

• Oil prices briefly jumped above $96 a barrel on Monday — the highest since 2014 — as investors grew skittish about continued access to Russian crude.
• Natural gas is an issue too. Europe — particularly Germany — is most exposed should supplies of Russian natural gas stop flowing. More than 20% of Germany's gas flows from Russia, so a gas shutoff to the European economic and export giant could hurt growth and reverberate throughout global supply chains.

Yes, but: The impact of a disruption of Russian raw materials would be broader. It's difficult to predict how the dominoes would fall.

Worth noting: High prices are also incentivizing American energy production.

• U.S. oil and gas giants have discussed plans to boost production, particularly in the Permian Basin in West Texas.
• American liquid natural gas exports to Europe have surged, amid a push to replace lost Russian supply.

What we're watching:

• Inflation: If oil prices hit $120 a barrel — as analysts think could happen if Russia invades — that could make the recent inflationary surge more long-lasting than economists now think. (Central banks are watching. More on that later.)
• Autos: An invasion could break another link in the rickety auto supply chain. Russia is the world's biggest supplier of palladium used in catalytic converters that scrub auto emissions.
• Wheat: Russia is the world's third-largest wheat producer — Ukraine too is a massive wheat farmer — and prices for the grain could spike on an invasion, even without major disruptions of shipments. (That's what happened during Russia's 2014 takeover of Crimea.)
• Aluminum: When Russian oligarch Oleg Deripaska — who controlled Russian aluminum producer Rusal — was sanctioned by the Treasury Department in 2018, it set off a 30% price surge.

The big picture: A potential Russian invasion of Ukraine adds to the headwinds investors were already facing to start the year from higher interest rates.

• Benchmark indexes in Europe and the U.S. suffered their third-straight decline on Monday. (They rebounded early Tuesday after Russia's statement that some troops were pulling back.)
• The S&P 500 dropped 0.4% in its third-straight drop. It's 8.2% below its Jan. 3 peak, and down 7.7% for the year.
• Major European indexes fared worse. Germany's DAX dropped 2% and France's CAC-40 fell 2.3%, in the third consecutive down day for both.
• The Nikkei 225 — Japan is an energy importer and vulnerable to high oil prices — also closed 2.2% lower.
• Russian markets also dropped, with the RTS falling 3% and government bond prices falling sharply.

Our thought bubble: Obviously the markets are not the most important thing in a situation like this, but they do underscore the point that a conflict in Ukraine will be costly, for combatants and onlookers alike.

The bottom line: A Russian invasion of Ukraine would complicate an already messy global economic picture.

Go deeper: U.S. braces for Ukraine invasion but Russia says diplomacy still alive