President Joe Biden and U.S. officials including Secretary of State Antony Blinken are sounding the alarm on a potential impending Russia invasion of Ukraine. That’s adding to pressure on equity markets, as one prominent economist warns of the stagflationary risks if there is indeed military conflict.
“If it were to get worse — which is a big if — a very strong stagflationary wind would blow through the global economy,” Mohamed El-Erian, president of Queens College at Cambridge University, told Yahoo Finance Live. “The marketplace now is pricing somewhere between we get a good diplomatic resolution, or we stay in this uncomfortable no war and no peace. We’re not really pricing in the possibility that this may be an armed conflict.”
Stagflation occurs when economic growth slows sharply and inflation rises.
The possibility of Russia invading Ukraine has already triggered an uptick in volatility in global equity, commodity and currency markets as investors try to game out the effect on food and energy supplies, plus the impact on European politics. Contradictory headlines about the positioning of Russian troops have only complicated efforts to analyze the potential economic fallout.
El-Erian, who’s also chief economic advisor to insurance giant Allianz, highlighted the potential for costs to continue to rise on a host of commodities if a Russia-Ukraine war materializes. Russia is a big exporter, producing 45.6% of the world’s palladium, 15.1% of its platinum, 9.2% of its gold, and 8.4% of its oil, according to JPMorgan.
“So the first element, simply a big cost push,” El-Erian said. “Second, you would have a significant blow to sentiment, confidence, and a further blow to globalization.”
Exacerbating market volatility, according to El-Erian, is the fact that the Federal Reserve, and other major central banks, are in a tightening cycle: “For a long time, this market had the anchor of a very accommodating liquidity regime. Inflation changes all that. We can no longer depend and rely and predict massive injections by the Federal Reserve.”
Meanwhile, Russia expelled the second-top U.S. diplomat in the country. Blinken made last-minute remarks to the United Nations Security Council, warning that the U.S. is concerned Russia is concocting false pretexts to invade Ukraine.
The VanEck Vectors Russia ETF was down nearly 5% as of Thursday afternoon, and has fallen nearly 9% this year.
Julie Hyman is the co-anchor of Yahoo Finance Live, weekdays 9am-11am ET. Follow her on Twitter @juleshyman, and read her other stories.
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