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Russia’s military aggression against Ukraine, which has become Europe’s largest ground war in generations, has impacted millions of people and triggered a large-scale humanitarian crisis as vulnerable Ukrainians take shelter or flee their homes. The intensification and spread of the conflict is deeply troubling and is having a devastating impact on those people caught in the crisis.

This article focuses on potential market and economic implications of the conflict.

The geopolitical impact of Russia’s invasion of Ukraine may come down to a few basic factors, including how long the conflict lasts and how the West responds.

It’s too soon to gauge the economic fallout ― both the short-term effect as the U.S. and Europe attempt to minimize the damage from higher crude oil and natural gas prices, and the long-term repercussions, as governments rethink the strategic framework that has guided post-Cold War policy. However, the length and intensity of the conflict will matter a lot.

“Much depends on the future escalation and duration of the conflict,” Capital Group economist Jared Franz wrote in a research note to analysts and portfolio managers.

Franz and other Capital Group economists in the U.S., Europe and Asia have tracked developments in Ukraine. The key issues they are monitoring include the economic ripple effect of higher energy prices and the now more difficult balancing act facing central banks as they attempt to corral inflation without stunting growth.

Capital Group economists believe a prolonged conflict could aggravate already high inflation while increasing the risk of an economic downturn. Nevertheless, the U.S. economy has distinct factors going its way, including a robust job market, vibrant consumer spending and corporate earnings that are still expected to rise in the high single digits this year. Assuming the conflict does not escalate, Franz projects U.S. GDP could rise 2% to 2.5% this year. That’s down from a 2.5% to 3% estimate at the start of the year, but in line with pre-pandemic growth.

Here is a look at some central economic and investment considerations:

Global markets typically ignore geopolitical conflicts unless they lead to an energy shock.

Few outside the intelligence community saw a full-scale invasion coming, something we should keep in mind as we assess the conflict and consider its potential course. Still, Capital Group political economist Talha Khan says the situation is following the logic of escalation and it has no visible off-ramps. As such, it could become a prolonged and messy war with acute humanitarian and economic costs that reverberate through the global economy.

However, history can be a useful tool when considering potential outcomes. Khan examined hundreds of armed conflicts around the world and the corresponding results of the S&P 500 over a five-decade period ending in 2014. He found that even protracted conflicts rarely had a lasting effect, with the index actually rising on average about 10% over the course of hostilities.

It can be uncomfortable to acknowledge that “these kind of major volatile reactions have typically tended to be good opportunities for long-term investors to make use of market dislocations,” Khan says. “The one exception is when interstate conflicts lead to energy price shocks.”

That may be the case in this situation. Russia supplies more than 6% of the world’s oil and some 40% of Europe’s natural gas. Prices have surged, with Brent crude breaking $100 a barrel for the first time since 2014. Initial sanctions from the West have specifically avoided punishing energy, though more punitive actions and Russian counter-measures could follow.

Khan’s analysis showed that, in conflicts that threatened to disrupt global energy supplies or push up oil prices, the upfront drop in stock prices was more pronounced. Even then, however, the S&P showed gains by the end of the combat.

Disruptions to energy supply are one way that the invasion could affect the global economy.

Much could depend on how much energy prices rise and how long they stay elevated. Franz estimates that every 10% increase in the cost of oil could shave 0.2 percentage points from U.S. GDP. In other words, a 50% jump in oil prices ― providing it’s sustained ― could slash 1 percentage point from growth.

Khan drew a historical parallel to the 1973 Arab-Israeli War. After that conflict, some members of the Organization of Petroleum Exporting Countries embargoed shipments to the U.S., resulting in price spikes and gas shortages. Prices never eased back to pre-embargo levels, settling about a third higher after the restriction was dropped in 1974. That structural change further fueled stagflation — a condition marked by stagnant growth and higher inflation — that plagued the ’70s.

The comparison isn’t precise — the U.S. is far less dependent on foreign energy today, and there was no global pandemic in the ’70s — but Khan says both periods tested the economic policy response. In the ‘70s, limited supply drove up prices and squeezed consumer spending power; today, it’s the challenge of reining in inflation while nursing an economic recovery that hasn’t taken full hold.

“The lesson learned from the 1970s is that you have to carefully monitor inflation expectations and the risk that they become unanchored,” he says. “Once you get behind the curve you risk getting into a wage-price spiral, in which workers demand higher wages to compensate for higher prices, which in turn causes prices to again increase. But if policymakers lift off too quickly, they can hurt the green shoots of the economy before they have a chance to take hold.”

The eurozone faces the most immediate threat from higher energy costs.

Europe is already exploring ways to reduce its dependence on Russian natural gas, says Capital Group political economist Michael Thawley. Germany, for example, has halted certification of Nord Stream 2, a pipeline designed to ferry more natural gas from Russia. Alternatives include expanded renewable energy, liquid natural gas and simply sourcing gas elsewhere. However, pivoting away from that dependence wouldn’t be fast or cheap.

“Europe is going to have to restructure its energy sources and depend much less on Russia,” Thawley explains. “That means it will have to rethink both gas supplies and how it fulfills its energy needs. But that will mean moving faster and spending a whole lot more money.”

Central banks could slow their plans to boost interest rates.

As part of their effort to control inflation and return to a more-typical monetary environment, the Federal Reserve and the European Central Bank have signaled plans to taper accommodative policies. The Fed has telegraphed its intent to raise rates several times this year, with the ECB planning to ease a bond-buying program. The current instability could make them rethink some of that, says Capital Group economist Robert Lind.

“Strong demand for oil and gas will compound these significant supply restraints,” he explains. “This could effectively raise inflation and depress growth at the same time. That would be the worst of all possible circumstances for policymakers because the combination of higher inflation and weaker economic growth is very hard for central banks to navigate.”

The problem isn’t as binary as “raise rates” or “don’t raise rates,” Lind adds.

“If you leave policy too loose for too long, then you can actually add to the problem itself,” he notes. “I think they'll be very cautious, very conscious to avoid those historical mistakes. I think they’ll proceed to tighten, but perhaps a little bit more cautiously than they would have done otherwise.”

Sanctions have been sharp and could become more so.

Over the past week, the U.S. and Europe have enacted a series of sanctions on Russia. Those include barring the Putin government, as well as certain banks and companies, from accessing Western capital markets. The U.S. imposed export controls that prevent Russia from purchasing critical technology for military and commercial uses. The West has also taken the rare step of targeting Putin’s personal finances, as well as those of business and government leaders close to him.

Perhaps most critical, the U.S. and Europe removed some Russian banks from the SWIFT financial communications system, essentially barring those institutions from conducting international transactions. Notably, the prohibition did not extend to all banks, especially those processing energy-related transactions. If it were to come, a blanket cutoff would mark a notable financial escalation that could effectively cleave Russia from the world financial system.

Other commodities could be shaken by the conflict and resulting sanctions.

Sanctions could affect more than just oil and gas. Russia is a significant supplier of minerals such as palladium (used in electronics), titanium (used in aircraft), nickel (a critical component for some renewable batteries), copper (ubiquitous among a wide variety of manufacturing and industrial applications) and potash (for fertilizer).

“The issue here is that Russia could reduce or cut off supplies of some of the key materials to counteract Western sanctions,” Thawley says. “Even if that doesn’t happen, importers are going to look to develop new supply chains that don't depend so much on Russia.” That could mean higher prices as competitors chase new sources in tighter markets and higher prices for the finished goods.

While there’s no indication that the conflict will spill outside of Ukraine, a wider conflict would compound these issues. Many governments have announced at least nominal support for Ukraine, and Russia has warned that it could seek to punish those offering material assistance or allowing military goods to flow through their borders to Ukraine.

“We should be sensitive to the risk that this could spread,” Thawley says. “It’s not negligible.”

Focus on the long term and avoid the urge to time the market.

Any type of uncertainty, particularly a military conflict, is naturally unsettling. Nevertheless, the best course of action has historically been to stick to your long-term investment plan. The pullback in global stock markets so far this year has reduced valuations, while potentially creating opportunities among companies that have been swept up by selling pressure. Though it can be difficult to stomach market downturns as they play out, rallies have often come at unexpected times. And while past results are not predictive of future outcomes, markets have historically risen more than they’ve fallen.