The Russian-Ukrainian conflict poses great risks to the world economy

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Exactly what a vulnerable global economy didn’t need – a conflict that is accelerating inflation, shaking markets and portends trouble for everyone from European consumers to indebted Chinese developers and African families facing soaring food prices.

Russia’s attack on Ukraine and retaliatory sanctions from the West may not portend another global recession. The two countries together represent less than 2% of the world’s gross domestic product. And many regional economies remain in good shape, having rebounded quickly from the pandemic recession.

Yet the conflict threatens to inflict severe economic damage on some countries and industries – damage that could mean hardship for millions of people. Russia is the world’s third largest oil producer and a major exporter of natural gas. Ukrainian farms feed millions of people around the world. And financial markets are in a precarious position as central banks prepare to reverse years of easy money policy and raise interest rates to fight a resurgence of inflation. These higher rates will likely slow spending and increase the risk of another downturn.

A man walks past a television screen with an image of Russian President Vladimir Putin in Tokyo, Thursday, February 24, 2022.
(AP Photo/Koji Sasahara)


“I wouldn’t be misled by just calculating GDP ratios…especially at a time when commodity prices are already high, inflation is already high,” said Elina Ribakova, deputy chief economist at the Institute of International Finance, a trade group for banks. “It’s a tricky time now, given the state of the global economy.”

Russia’s attack could slow Europe’s economic recovery by driving up already high energy prices. Europe, an energy importer, receives nearly 40% of its natural gas from Russia. A cut in this energy source could undermine the continent’s economy. High natural gas prices have already resulted in higher utility bills for natural gas heating and gas-fired electricity, which has the effect of reducing consumer spending.

People line up to withdraw their money from an ATM in Mariupol, Ukraine, Thursday, February 24, 2022.

People line up to withdraw their money from an ATM in Mariupol, Ukraine, Thursday, February 24, 2022.
(AP Photo/Sergei Grits)

“Gas prices in Europe are already crushing households and consumers, especially low-income households,” said Adam Tooze, director of the European Institute at Columbia University, whose 2018 history of the financial crisis of the last decade, “Crashed”, explored the tensions over Ukraine.

“The escalation of tensions jeopardizes two cornerstones of the growth recovery expected this year – a rebound in consumer spending and a recovery in industrial activity,” said Oliver Rakau and Mateusz Urban of Oxford Economics in a research note.

Natural gas prices, which have tended to rise following the news of the crisis, remain around four times higher than they were at the start of 2021. Russia sold less gas than normal on the short-term spot market, raising fears that the Kremlin could use gas to press for approval of its Nord Stream 2 gas pipeline. The pipeline has now been frozen by sanctions imposed by the German government.

A foreign exchange trader talks on the phone in the foreign exchange trading room of KEB Hana Bank headquarters in Seoul, South Korea, Thursday, Feb. 24, 2022.

A foreign exchange trader talks on the phone in the foreign exchange trading room of KEB Hana Bank headquarters in Seoul, South Korea, Thursday, Feb. 24, 2022.
(AP Photo/Ahn Young-joon)

A mild winter and additional supplies of liquefied natural gas from the United States helped ease some of Europe’s concerns over a potential loss of Russian gas. Analysts say Russia has no interest in a complete gas cut, which would mean a big loss of revenue.

The threat to eastern Ukrainian farms and exports through Black Sea ports could reduce wheat supplies at a time when global food prices are at their highest level since 2011 and some countries suffer from food shortages.


Ukraine is the world’s fifth-largest wheat exporter, agricultural analyst Alex Smith wrote last month in the journal Foreign Policy, and many countries that depend on its wheat “are already facing food insecurity due to ‘continued political instability or outright violence’. Yemen, for example, imports 22% of its wheat consumption from Ukraine, Libya about 43%, Lebanon about half.

Rising energy and food prices will intensify inflationary pressures that policymakers and central banks are struggling to mitigate. According to Capital Economics’ estimate, the worst-case scenario of an escalation of the conflict and sanctions could push oil prices up to $140 a barrel – international Brent crude surged above $100 on Thursday after Russia attacked Ukraine – and forced natural gas prices up too.

This combination would add 2 percentage points to annual inflation in the rich countries of the world, estimates Capital Economics. In the United States, the world’s largest economy, consumer inflation jumped 7.5% last month from 12 months earlier, the largest annual increase since 1982.

With inflation soaring, central banks may have less leeway — or inclination — to come to the rescue with stimulus if the economy falters in the face of military conflict in Ukraine.


“The current inflationary backdrop suggests that policymakers have less flexibility than in the past to react to a slowdown in real activity or a fall in asset prices,” said Jonathan Petersen of Capital Economics.

Indeed, stocks tumbled in anticipation of higher rates and a potential downturn. Market benchmarks in Europe and Asia fell 4% on Thursday, while Wall Street futures fell an unusually wide daily margin of 2.5%.

Amid geopolitical worries, Michael Taylor, managing director of Moody’s Investors Service, warns that investors could flee to Treasuries and other super-safe investments, pushing up the relative costs of credit for riskier companies.

“Chinese real estate developers would be particularly exposed to this risk” as they attempt to refinance large amounts of foreign debt this year, Taylor said.

Financial markets could become even more chaotic if the United States opts for what some call the “nuclear option”: excluding Russia from the SWIFT payment network, a messaging service that connects thousands of banks and allows them to transfer payments worldwide.

Such a move would isolate Russia and prevent the transfer of profits from energy production, which account for more than 40% of the country’s income. But excluding Russia from international finance could also have the opposite effect and harm American and European companies that do business with Russian companies.

“There are as many risks for global finance as for Russia,” said Ribakova of the Institute of International Finance.


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