Russian escalation in Ukraine increases global economic risks
Russia’s decision to deploy troops to two breakaway Ukrainian provinces and the possibility of increased aggression and retaliatory sanctions from the West raises risks to a global economy already reeling from supply chains congested and some of the highest inflation in years, including soaring energy prices spurred even higher by tensions.
On Monday evening, President Vladimir Putin ordered soldiers to two breakaway regions of Ukraine after recognizing their independence. The move threatens to derail negotiations with the West over the future security of Eastern Europe and trigger retaliatory sanctions.
The price of oil surged, with the global benchmark briefly approaching $100 a barrel, although it pulled back somewhat in early afternoon trading in Europe. Other major Russian and Ukrainian exports, such as natural gas, wheat, aluminum and nickel, also increased. Major companies operating in Russia or dependent on the country’s raw materials said they were bracing for disruption.
Early on Tuesday, Germany said it was indefinitely suspending its plan to certify the Nord Stream 2 gas pipeline, which was to increase Russian gas volumes to Germany, in retaliation for Russia’s military move. The European Union, meanwhile, was considering sweeping sanctions against Russian entities, including a ban on buying Russian debt and sanctions against all members of the Russian Duma, a key legislative body, diplomats said.
British Prime Minister Boris Johnson announced on Tuesday the first wave of sanctions “targeting Russian economic interests as much as possible”. Mr Johnson said the UK would sanction five Russian banks and three very wealthy people. The UK will be frozen, those affected will be banned from traveling here and we will ban all UK individuals and entities from having any dealings with them,” the Prime Minister told lawmakers.
“We expect there to be more irrational Russian behavior to come,” Mr Johnson had said before the announcement.
The brunt of any economic pressure is likely to be borne by Europe, which relies heavily on Russian energy, and whose banks and companies could be caught in the sanctions. These measures, while aimed at Russian entities, could raise a host of new supply issues for Western companies, including making it harder to finance raw material purchases or send parts to their operations in Russia.
Renault SA chief executive Luca de Meo told analysts on Friday that an escalation of tensions between Russia and Ukraine could lead “to a new supply chain crisis linked to parts that are expected to come from the foreigner”. Oleg Solodukhov, a partner at Kyiv-based shipping consultancy The Charterers, said the crisis had added $3 to $5 per metric ton to freight costs from Black Sea ports. he declares. metric ton on voyage charters, Mr. Solodukhov said.
The crisis in Ukraine is complicating the already delicate calculation of major central banks, including the Federal Reserve and the European Central Bank, as they prepare to phase out pandemic stimulus policies amid soaring inflation. Both the Fed and the ECB are expected to be more cautious at policy meetings next month, where they are expected to present bold plans to phase out easy money.
The dispute is unlikely to change the Fed’s calculation on whether to raise interest rates at its March 15-16 meeting. But the economic uncertainty of such a dispute is likely to weaken the case for the Fed raising rates by half a percentage point larger. For the ECB, the conflict in Ukraine makes it unlikely that the bank will accelerate the planned move towards interest rate hikes, given the likely negative impact on growth and confidence, said Isabel Schnabel , who sits on the six-member ECB Administrative Board. an interview with the Financial Times last week. Investors have already started reversing their bets on when the ECB will start raising interest rates, according to money market data.
The extent of the impact will depend on the scale and duration of Mr. Putin’s ambitions in Ukraine. The two separatist enclaves he ordered troops into on Monday evening were largely controlled by Moscow anyway. If he continues to push troops further into Ukraine – a prospect Western leaders have declared possible for weeks – the critical infrastructure that brings the two countries’ vast exports to market could be at risk. The severity of sanctions from Washington, Brussels and the UK will also determine how much the conflict spills over to economies further afield.
Some economists say the worst-case scenario could be a 1970s-style crisis, in which supplies of natural gas, oil and other raw materials are hampered at a time when demand from economies just emerging from pandemic shutdowns is rising. sharply.
Russia and Ukraine together represent a tiny share of global economic output and do not represent significant export markets for Europe or the United States. But at a time when prices for oil, gas and other commodities such as wheat are already fueling a global spike in inflation. , any loss of supply from Russia and Ukraine could push prices even higher and weaken economic output, especially in Europe.
The UK’s National Institute for Economic and Social Research has made calculations based on tensions rising to the point that sanctions are imposed on Russia’s energy exports or that Russia itself cuts its exports by gas in retaliation for further sanctions. Such interruptions would reduce global economic growth this year by just under 1 percentage point, to 3.3%. For the Eurozone, the impact would be greater, with annual growth slowing to 2.1% from 3.8% without price increases and the reduction in business investment that the NIESR expects the threat of war entails.
“The general implications… are somewhat reminiscent of the energy crisis of the 1970s,” the NIESR said. “Rising prices and supply limitations have severely disrupted economic activity in the global economy and led to higher inflation.”
According to the EU statistics agency, the bloc relied on Russia for 47% of its gas imports in the first six months of 2021, more than double the 21% it bought from its own. second supplier, Norway. During the same period, Russia accounted for almost a quarter of EU oil imports, followed again by Norway with a share of 9.1%.
“Substantial cuts in Russian gas supplies to Europe would be difficult to replace in the short term,” wrote Jeffrey J. Schott, senior fellow working on international trade policy and economic sanctions at the Peterson Institute for International Economics, in a report on possible sanctions.
Russia is also a major producer of copper and aluminum. Any difficulty in getting these products to customers around the world would cause further disruptions in already strained supply chains. Struggling to overcome a shortage of semiconductors, the auto industry could face additional problems if Russia’s palladium supply slows. The metal is used in catalytic converters. Russia’s MC Norilsk Nickel PJSC is the world’s largest producer, accounting for between 25 and 30% of total production.
Along with Ukraine, Russia is a major producer of wheat, as well as key fertilizer ingredients such as urea and potash. Any reduction in the supply of any of these items would likely cause food prices to rise. The two nations combined account for 29% of global wheat exports, according to data from the US Department of Agriculture.
The nearby Black Sea serves as a major transit route for international grain shipments, and Ukraine is also among the top exporters of barley, corn and rapeseed. Egypt and other countries in the Middle East and North Africa rely heavily on Russian and Ukrainian grain.
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