Russia’s invasion of Ukraine carries huge risks for a world economy that’s yet to fully recover from the pandemic shock.

The conflict already looks like the most serious war in Europe since 1945. Russian forces carried out airstrikes, captured army bases and advanced toward Kyiv as civilians fled. Western officials said the capital may fall at any time, with its air defenses eliminated.

The assault followed weeks of tensions that already sent tremors through the world economy by ratcheting up energy prices. That accelerated on Thursday. Oil briefly climbed past $100 a barrel for the first time since 2014, while European natural gas jumped as much as 62%.

                      


As Ukraine fights for survival, Western governments are taking steps to punish Russia. They’re aware that by doing so, they could heighten the conflict’s impact on their own economies.

U.S. President Joe Biden — who on Thursday announced new sanctions that target Russia’s banks and its ability to trade in dollars — has warned that there’ll be also a price to pay at home, where expensive gasoline is already eroding his support among voters.

The pandemic has left the global economy with two key points of vulnerability — high inflation and jittery financial markets. Aftershocks from the invasion could easily worsen both.

There’s a threat to growth too. Households spending an ever-larger chunk of their incomes on fuel and heating will have less cash for other goods and services. Plunging markets would add another drag, hitting wealth and confidence, and making it harder for firms to tap funds for investment.

For central bankers, the twin challenge — of managing prices and keeping their economies growing — will get even harder. 

In the first, a swift end to fighting prevents a further upward spiral in commodity markets, keeping U.S. and European economic recoveries just about on track. Central bankers would have to tweak their plans, not scrap them.

In the second scenario, a prolonged conflict, tougher Western response and disruptions to Russia's oil and gas exports would deliver a bigger energy shock and a major blow to global markets. That would likely take ECB rate hikes off the table this year, while Fed tightening would slow down.

                                   

A worst-case outcome would see Europe’s gas supply cut off, triggering a recession, while the U.S. would see significantly tighter financial conditions, a bigger hit to growth, and a markedly more dovish Fed.

Wars are inherently unpredictable, and the actual outcome is likely to be messier than any of these stylized versions. Wild swings in financial markets Thursday illustrated the uncertainty. Still, the scenarios should help frame thinking about possible paths ahead.