Goldman On The Consequences Of Recent Geopolitical Events

Tyler Durden's picture

The current US air strikes in Iraq are unlikely to have a significant impact on defense spending or oil prices, Goldman Sachs writes, unless the scale of the conflict changes considerably. Evidence from past US conflicts that were similar in scale also suggests little impact on confidence and at most mixed evidence of a flight-to-safety effect in financial markets. The exchange of sanctions with Russia - a relatively minor US trading partner - is also likely to have only a modest impact on the US economy. Of course, Goldman caveats, both situations are highly unpredictable; as they expect little reaction to recent events from Fed officials, who have generally not discussed conflicts of this magnitude unless accompanied by other economic concerns, such as a large rise in oil prices.

Via Goldman Sachs,

In today's note, we answer a number of frequent questions about recent geopolitical developments, in particular the recent air strikes in Iraq and the latest rounds of sanctions between the US and Russia.

Q: How are the current air strikes in Iraq likely to affect defense spending?

A: On August 7, President Obama announced that he had had ordered the US military to conduct air strikes in Iraq against forces of the Islamic State (ISIS) and to distribute aid to refugees from the fighting, but said that he "will not allow the United States to be dragged into another war in Iraq" (New York Times). As currently planned, the action would be most similar to previous small-scale air operations, such as a 1998 action in Iraq or the 2011 conflict in Libya, in which costs have run from the hundreds of million to about $1bn, as shown in Exhibit 1. Relative to monthly Department of Defense outlays in excess of $40bn, such costs would not noticeably change the defense spending picture. In terms of timing, national accounts data on sub-categories of defense spending (in particular missiles) surrounding eleven previous conflicts of this magnitude (shown below in Exhibit 3) suggest that the impact is likely to appear in the initial or following quarter, if it is observable at all.

Military actions can of course be highly unpredictable, and past experience suggests that spending risks are slanted to the upside: as economist William Nordhaus has noted, the costs of past US conflicts were frequently underestimated in advance. Previous medium-scale conflicts, such as those in Bosnia and Kosovo, have seen costs in the $5-$10bn range, while larger wars--shown on the right-hand side of Exhibit 1--have seen dramatically higher costs. As a baseline, however, we do not expect the current air strikes to disrupt the recent downward trend in defense spending. Defense spending has fallen by about one-sixth since 2010Q3 in real terms, shrinking from 5.6% of GDP to 4.4% in 2014Q2.

Q: How large of an impact is the conflict likely to have on oil prices?

A: Oil prices rose to a nine-month high in the days of conflict over the Baiji oil refinery, Iraq's largest. But the increase reversed in the following week without a clear reversal of the situation in Baiji, and most major developments in the conflict with ISIS have not been associated with large daily changes in oil prices, as shown in Exhibit 2. In contrast, larger previous conflicts in Iraq and elsewhere in the Middle East saw much larger swings in oil prices, often with large macroeconomic consequences. One reason for the limited reaction recently is that despite its advances in northern and western Iraq, ISIS remains far from the key southern oil fields and export terminals. A second reason is that shale has reduced the vulnerability of oil markets to supply shocks originating in the Middle East.

Q: Are other economic or market impacts likely?

A: The modest impact on defense spending suggests that to be economically important, small-scale conflicts would need to affect either confidence or financial conditions. To gauge the likely impact of the current conflict, we look back at eleven earlier US conflicts of similar magnitude. We find no obvious effect on measures of confidence following the start of US involvement, and only mixed evidence of a flight-to-safety effect in market data (Exhibit 3). One obvious limitation of this analysis is that, in contrast to recent events, most of the other events were not particularly surprising by the time US involvement began.

Q: How will recent sanctions affect US trade with Russia?

A: While early rounds of US sanctions targeted Russian individuals and associated companies, new sanctions imposed in July were more severe. The US and EU have imposed sanctions on firms in the financial, energy, arms, and shipping industries, and Russia has responded with import restrictions on agricultural products.

While sanctions are likely to have a larger impact on the Russian economy, the effect on the Euro area economy is likely to be more modest and the effect on the U.S. economy is likely to be smaller still. Russia is a relatively minor US trading partner, accounting for an average of just 1.1% of US goods imports and 0.7% of US goods exports over the last 12 months, of which about $1bn was US food exports (compared to total US exports of over $2 trillion). That said, Russia accounts for a considerably larger share of US trade than most other recent US sanctions targets, and some multi-nationals have already noted a hit to sales.

Q: Will Fed officials seek to counteract geopolitical risks?

A: Last week, European Central Bank President Mario Draghi noted that "geopolitical risks are heightened" (ECB press conference) and said that recent developments potentially pose risks to both growth and price developments in coming quarters. How likely are Fed officials to express similar concerns or act in response to these risks?

In the FOMC meetings immediately following the outbreak of the eleven conflicts shown in Exhibit 3, we find only two occasions on which the minutes, transcripts, or statements referenced the conflict. Following the start of US involvement in the Kosovo conflict, Governor Edward Kelley pointed to the possibility of "a very nasty war in the Balkans" as a reason for the Fed not to hike preemptively, and Chairman Alan Greenspan agreed (transcript). More recently, Chairman Ben Bernanke cited the conflict in Libya as a cause of higher energy prices in his press conference, and the FOMC statement at the time highlighted "concerns about global supplies of crude oil." This suggests that current geopolitical risks are likely to influence monetary policy only if associated with a sustained spike in energy prices. The Fed's Monetary Policy Report issued on July 15 noted that oil prices had risen beyond their recent range "only temporarily in reaction to events in Iraq," and prices have since declined.

The limited response to smaller conflicts reflects their modest economic and financial impact, as well as the concern--noted in 1998 by former Cleveland Fed President Jerry Jordan--that while the Fed has "a long history of responding to … international events such as financial crises and military actions," it has to "be very, very careful about how much of a response we make because the developments in question tend to be reversed. … We have had a number of episodes in the past where we responded to surprises and overstayed our response"

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So summing it all up - don't sweat it... geopolitics, schmeopolitics... (unless of course things escalate)

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oudinot's picture

Canadian oil sands, shale oil need $100/bbl oil; below that, they lose money, oil exploration dries up.

Cattender's picture

it's a Recovery Buy stock.. No Possible Way it will go Down. EVER.

Latina Lover's picture

Gee Goldman, I wonder what happens if Russia cuts off gas to Europe.  I suspect then that the EU might be more than slightly affected. Might that be a possibility?

johngaltfla's picture

Goldman has no clue as to how severe this situation is. NATO just raised the stakes:


NATO Raises the Stakes: US and Allies to Attack Russia if they Send Troops into Ukraine


Obama is willing to kill hundreds of millions of people over a small part of the world inhabited by ethnic Russians. I would advise one start preparing their fallout shelters NOW.

knukles's picture

Obie golfs in a privileged enclave.  Plugs is silent.  Kohn is in American Samoa or some such nowhere doing what?
And my Progressive buds say everything is in Good Hands With the State.


Announcing the New Reality Program of the Season; Leadership of the Anti-Christ.

Manthong's picture

“If Russia tries to infiltrate troops into a Nato country,.”

That’s been the NATO threat since the beginning of the last cold war.

Ukraine is not NATO, but I would be very surprised if their mercenaries are not fighting with the hundreds of our  “Contractors” on the ground there now at this moment.

knukles's picture

Manthong, that couldn't be.  Else Goldman would tell us.

Latina Lover's picture


From Reuters, as per your page:

US Air Force General Philip Breedlove, Nato’s Supreme Allied Commander Europe, said although Nato had no plans to intervene in non-Nato member Ukraine, Nato countries in eastern Europe needed to start preparing for a possible threat from “little green men” — referring to soldiers in unmarked uniforms.

In other words, NATO will not directly attack Russia should Putin invade.  They may leave the option open but I doubt that most european countries would agree to attack Russia over the Ukraine. The USSA may do so, but not as part of NATO.

Duc888's picture



Goldman Sux, tryin' to figure out how to get the skim.


Fukken Squid.

Duc888's picture



Shale oil was a scam from the get-go.  It's done.

knukles's picture

Understand hookers are making fortunes in the Dakotas.
So somebody is working for a living.

Atomizer's picture

Inflationary rates are contained. 


highly debtful's picture

Yes, like I'm really interested in Goldman's take on the economic impact of geopolitical events. These financial masterminds did not even see their own downfall coming in 2008 and had it not been for the taxpayer, they would have gone bust pure and simple. So, Goldman Sachs, you know what you can do with your predicitions and exhibits one, two and three. If I really want to know where things are headed, I'll consult Shadowstats. Or a crystal ball. Even that seems like a safer proposition.

Otrader's picture

With former Goldmanite Hank Paulson, I think they knew perfectly well what the outcome would be in 2008 - FREE MONEY!  The corrupt DC politicians know who the money masters and their agents are.  The taxpayers are at the mercy of these so called Representatives, who are bought with the Rothchilds money.   All we can do is bitch about it on talk radio and blogs.   The money will be taken and taken some more.  Everyone on ZH knows another financial storm is coming and even more money will be taken, again.  And, there is nothing anyone can do about it.

"We are completely dependant on the commercial banks. Someone has to borrow every dollar
we have in circulation, cash or credit. If the banks create ample synthetic money we are prosperous; if not, we starve. We are absolutely without a permanent money system.... It is the most important subject intelligent persons can investigate and reflect upon. It is so important that our present civilization may collapse unless it becomes widely understood and the defects remedied very soon." — Robert H. Hamphill, Atlanta Federal Reserve Bank

souljaboy's picture

We're bombing the hell out of the area around the ISIS-held Mosul dam. It would suck if we bombed the dam by mistake. That scares me.

I am Jobe's picture

Restoring peace and humanitarian aid is the objective of the USSA along with destruciton and raping and looting. Fear not Amerika will do it's part to destroy what is left.

Tinky's picture

Shouldn't scare you as much as this:


At least 20 patients believed to be suffering from Ebola have fled a quarantine clinic in Liberia after protesters reportedly broke down the doors and looted the building, sparking fears of a serious health risk.

Tolbert Nyenswah, the assistant health minister, said protesters were apparently displeased that patients were being brought in for treatment from different parts of the capital. Other reports suggested they were concerned Ebola is a hoax.

West Point residents went on a "looting spree," stealing items from the clinic that were likely infected, a senior police official told the Associated Press. The residents took medical equipment, mattresses and sheets that had bloodstains, he said.

"All between the houses you could see people fleeing with items looted from the patients," the official said, adding that he now feared "the whole of West Point will be infected."

West Point is home to at least 50,000 people. The patients' whereabouts remain unknown.

BrosephStiglitz's picture

Vice did a documentary on this place.  It is on youtube.  Search for "The cannibal warlords of Liberia"

They explore West-Point.  The place is a dung heap.

NoWayJose's picture

Sure Russis is only minor trading partner with the US - but Russia is very important to the EU. And if the EU gets into trouble due to US sanctions, then the whole world of bail outs, bail ins, bond defaults, and derivatives blowing up just might affect the US. Very narrow viewpoint by Goldman - but we have no way to know if that is intentional.

falak pema's picture

Goldman has no way of evaluating the only consequences that count which are NOT CB controlled; as they be UNFORSEEN.

Spastica Rex's picture

I find your lack of confidence disturbing.

Sparkey's picture

You are a good thinker Falak, People get 'Cocky' when they see themselves as clever, They begin to believe the voice in yheir heads which urges them to, 'Take what you want, it is yours for the taking'. Someone who robs liquor stores for a living, might, after a long enough string of successes, get cocky and believe the voice, in his head, which says; You know what you are doing, you were born to do this, God gave you liquor stores to rob, so rob on, God will take care of anything you have forgotten! Faith is a marvelous thing, it gives men the ultimate courage! Trust the infailable Priests of the money Temple, God anointed them to advise and rule over us!, at least for a while, until Jesus gets back.

Atomizer's picture
Bosnia: the epidemic calamity of failure.


ekm1's picture

I am not interested in whatever any primary dealer says.

It is just bank lobby propaganda

barre-de-rire's picture

fall smelling, less & less ppl online  on sunday, day of christ sucking dick day, & cleaning guns... while, in the rest of the world, ordinary violence...

while in ferguson, nigga slowly get back home, a niger cannot protesting more than 4 days, too much tired, need to rest,, usually 2 days rioting, 1 day lloting, on day resting, this is ordniary week for monkeys.



just thinking shit over the world can go on just like in 1984 for about 150 years before something move on this fucking ape planets.

viator's picture

Onward and upward.

JR's picture

Is it just me or does Goldman, an enterprise so large and so controlling of America’s financial system, especially through the Fed’s financing of wars and transfers of America’s labor and wealth to themselves and to war material, sound exactly like a killer? Because when you have that much control over politicians, commerce and the currency, to casually remark on the market results of killing people and blowing up infrastructure and robbing people of their resources, can only be identified as godless.

Imagine the president of the United States, who like Goldman and the Fed can wage war, saying that consistent and numerous air strikes in Iraq will have little effect on your investments or everyday life.

Simultaneously, as the Fed's physical wars wipe out nations and their resources, financial wars rage as well to steal nation's resources.

Billionaire Zionist, Paul Singer, who it is said has made buying up insolvent debts for a song and later cashing in on them by force his specialty, is now consolidating “his fortune at the expense of the Argentinian people, while already setting his sights on Spain.”

Wrote Jérome Duval and Fatima Fafatale August 1, 2014, on “’Vulture funds’ refer to companies that buy insolvent debts for a song and later try to cash in on them by force… The vulture fund NML Capital that, together with others, has Argentina on the edge of suspending payments, is already devouring the rotting flesh of the Spanish market. Elliott Management, the opportunistic fund of the serial U.S. speculator Paul Singer, has already pocketed a billion euros of Bankia’s failed credit and 300 million euros of Santander. It is estimated that it has paid hardly 50 million for both these portfolios, according to

“In March 2013, the Spanish financial press informed that Elliott had acquired from the Santander Group a portfolio of 300 million euros of defaulting credit of Santander Consumer Finance with a discount approaching 96%. The price that was paid was laughable: about 12 million euros, according to Cinco Dias.” ...

Writes Forbes: “The issue goes back to Argentina’s 2001/2 sovereign debt default, dubbed the largest in modern history, where the second largest South American economy ceased payments on approximately $100 billion in foreign debt…”

“But the fact is,” wrote Mark Gongloff July 31 on Huffington Post, “that one conservative American billionaire and a handful of American judges have just pushed Argentina, a nation of 43 million people with an economy bigger than that of the Netherlands or South Africa, into defaulting on its debt. It's a move that threatens not only chaos for the Argentinian people, but potential chaos for other countries hoping to borrow money in the future.

"’This is America throwing a bomb into the global economic system,’" Columbia University economist Joseph Stiglitz told The New York Times on Thursday in a front-page story about the battle." ...