When Russian military forces entered Ukraine in February, the resulting conflict created a stark humanitarian crisis and the looming fear of global financial upheaval. With many countries responding to the situation by levying economic and trade sanctions against Russia, international business sectors including food, fuel and finance have already begun to experience the effects.

According to three professors from the Center for Global Business Studies at the Penn State Smeal College of Business, the longer this conflict continues, the wider and more serious its economic ripple effects will become.

While it is too soon to predict the long-term financial and societal impact of this ongoing conflict, the professors point to several areas of immediate concern: the increased volatility of international business interests, the suddenly precarious instability of the Russian economy, and a potentially catastrophic threat to the global food supply.

“It is fair to say that most global companies were not fully prepared for the effects of war in Europe and the economic sanctions imposed on Russia for its invasion of Ukraine,” said Terrence Guay, director of the Center for Global Business Studies and clinical professor of international business at Penn State Smeal.

In recent days, oil giants Shell, BP and Exxon have chosen to walk away from their multi-billion dollar investments in the Russian energy industry. Ford, BMW and Volvo have stopped shipping cars to or manufacturing in Russia. Boeing and Airbus will not sell replacement parts to Russian airlines, Maersk refuses to ship goods into or out of Russia, and Apple will not sell phones or services within the country.

Guay noted that these decisions have been made in part for practical reasons, including the constraints that Western sanctions on banking place on the movement of money into and out of Russia. But, he said, most of these business decisions also reflect the seriousness of the conflict, the egregious behavior of Russian President Vladimir Putin, and a deep understanding that business has a role to play in bringing this conflict to an end.

“Multinational corporations often find themselves caught between the financial desire to do business in lucrative markets and the public expectation that business can be a force for good,” said Guay, whose academic research focuses on globalization and corporate social responsibility.

“In recent years, many global companies have been reluctant to make public statements or alter operations due to a variety of ethical concerns," Guay said, including including issues in different countries including human rights abuses, corruption, labor abuses and environmental degradation. "But as this conflict between Russia and Ukraine unfolds, numerous companies are now stepping up to say ‘people and peace are more important than profits,’ which is an ethical influence that we have not seen at this scale in other cases.”

Guay acknowledged that how the conflict and the resulting decisions by global businesses will affect the Russian economy remains to be seen. But, he suggested the early indicators point to hard days ahead, coming at a time when the effects of tariffs imposed by former U.S. President Donald Trump and the impact of the COVID-19 pandemic on global supply chains are both still being felt.

“The coming years will be a fascinating time to see how global companies re-calibrate country risk,” Guay said.

The financial impact of sanctions

Russia’s economy had been increasingly appealing for international businesses prior to the conflict, but that rising potential has taken a sharp turn since the conflict began, according to Lou Gattis, a clinical professor of finance at Penn State Smeal.

“In 2021, the country enjoyed budget and trade surpluses aided by high oil prices and a recovery from earlier COVID shutdowns,” he explained. “This allowed Russia to stabilize the ruble and build up its exchange reserves — sometimes referred to as a nation’s ‘war chest’ — to an all-time high of $630 billion.”

Today, the rising cost of the military conflict, combined with the staunchly effective Ukrainian resistance and the world’s pointed rebuke of Russia’s actions, have coalesced, creating a downward spiral for the Russian economy.

According to Gattis, the devaluation of the ruble, which is now down more than 30 percent year-to-date against the euro, dollar and yuan, will lead to higher import prices and create additional inflationary pressure within Russia. To make matters worse, the Russian stock market has tumbled by approximately 40 percent so far this year.

Gattis lectures on foreign exchange forecasting and hedging strategies in Penn State Smeal’s Executive MBA program in Philadelphia. He noted that Russia sharply raised interest rates from 9.5 percent to 20 percent in attempt to prop up the ruble and stem banking system withdrawals.

“This is a response that I discuss in my global finance course,” Gattis said. “Russia is in danger of having its debt ratings lowered to junk status. Such a downgrade would make it even harder for the country to borrow money, and further raise its borrowing costs in the future.”

The situation is further complicated as the U.S. and other countries pledge to ban certain Russian banks from the SWIFT international financial system, Gattis explained.

“While this ban will not entirely halt Russian international transactions, it will make it more expensive for Russian banks to operate and also make it more costly for multinational companies to do business with Russia,” he said.

Many nations have also leveled specific sanctions against Russian imports, and some countries are banning their technology exports to Russia, which are necessary to support its oil refineries. The value of Russian oil is also in flux, with the U.S. now banning imports of Russia’s largest export, petroleum.

Global food supplies and food insecurity

As Australia, Japan, Switzerland, the United Kingdom and other nations freeze the assets of Russian oligarchs, the nation’s central bank, and even Russian president Vladimir Putin himself, the trickle-down effects of the conflict and its international response will continue to disrupt the Russian economy. These factors will also likely cause serious disruptions to the global supply chain and pricing pressures for many goods and commodities — most importantly food, according to Peter Mhando, associate teaching professor of international business and international affairs at Penn State Smeal.

“As leading exporters of major grains and vegetable oils, Ukraine and Russia are critical global food suppliers,” he said. “In addition, Russia is also the world’s leading exporter of fertilizer, which is a critical component of global food production. When Russia previously opted to stop its grain exports temporarily in 2020 and for nearly a year in 2010, both instances led to price hikes around the world and resulting food insecurity in many regions.”

According to the International Trade Center, Russia and Ukraine provided roughly 26 percent of global wheat exports in 2020. In that same year, Asia, the Middle East and Africa — where food insecurity is a serious concern — consumed 95 percent of Ukraine’s wheat exports. As a result, Mhando explained, any disruption to grain exports could create further economic instability and social unrest in nations that depend on Russia or Ukrainian exports for food supplies.

“There are many direct and indirect implications to possible instability in the global food supply,” said Mhando, whose research focuses heavily on the African economy. “For example, sub-Saharan Africa currently imports $15 billion in food crops like grains, edible oils and sugar. Disrupting the food supply of this region could lead to catastrophic ripple effects, not just for food prices but also the potential of additional violence in these areas as a result of food insecurity.”

As the Russia–Ukraine conflict continues to evolve, no one can say for certain when it will end or what its ultimate impact on global finance and international relations will be. However, Mhando said, “the eyes of the world are now watching to see how every new decision in this conflict will affect the economic stability of businesses and households alike.”