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THE EFFECTS OF THE RUSSIA-UKRAINE CONFLICT ON THE GLOBAL ECONOMY

The ongoing dispute between Russia and Ukraine allegedly has crucial consequences for the world economy, which is still recuperating from the pandemic of covid-19. The International Monetary Fund (IMF) stated in March the dispute is a vital blow to the world economy that will damage growth and raise prices.

The IMF had pointed out earlier that both Russia and Ukraine are vital commodity producers and disturbances there have evolved in ascending global prices, especially of oil and natural gas. Russia is the world’s 3rd oil producer, the 2nd natural gas producer and among the top 5 producers of steel, nickel and aluminium.

It is also the largest wheat exporter in the world (almost 20% of global trade). On its side, Ukraine is a key producer of corn (6th largest), wheat (7th), and sunflowers (1st), and is amongst the top ten producers of sugar beet, barley, soya and rapeseed. The IMF also added that the whole world economy would feel the effects of slow growth and fast inflation. 

The World Bank also stated in the Spring 2022 Economic Update for Europe and Central Asia that the dispute brought a second great trauma to the world economy in two years and caused a generous disaster. “Even prior to the war, the global recovery had already been decelerating alongside intensifying geopolitical tensions, continued COVID-19 flare-ups, diminishing macroeconomic support, and lingering supply bottlenecks,” it noted.

DEEP RECESSION AHEAD FOR THE RUSSIAN ECONOMY

The Russian economy will be in huge trouble in 2022, falling into a deep recession. GDP forecast for 2022 stands at -7.5% after the recovery encountered last year. This has guided us to lower the country’s risk assessment from B (fairly high) to D (very high). Sanctions notably target major Russian banks, the Russian central bank, the Russian sovereign debt, selected Russian public officials & oligarchs, and the export control of the high-tech units to Russia.

These measures put substantial downward pressure on the Russian remains, which have already dived, and will drive a rush in consumer price inflation. The Russian economy could ease from higher prices for commodities, especially for its energy exports.

However, EU countries declared their plan to limit their imports from Russia. In the industrial sector, constricted access to Western-produced semiconductors, computers, telecommunications, automation, and information security appliances will be harmful, given the significance of these inputs in the Russian mining and manufacturing sectors.

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POVERTY AND HUNGER  

The World Bank’s control projection accepts Ukraine’s poverty, based on the $5.50 per day threshold rate, will increase from 1.8% in 2021 to 19.8% in 2022. It added that models evolved by the United Nations recommended that a more acute and prolonged war could usher in poverty affecting nearly 30% of the population. Quoting estimates from authors of a Centre for Global Development blog, the World Bank said the latest rush in food prices could push an additional 40 million people under the $1.90-per-day poverty line.

The IMF recalled similar concerns. It said in March, “Steeper price increases for food and fuel may spur a greater risk of unrest in some regions, from Sub-Saharan Africa and Latin America to the Caucasus and Central Asia, while food insecurity is likely to further increase in parts of Africa and the Middle East.”

The dispute deranged Ukraine’s planting and harvest season and destroyed critical fields, stores, infrastructure and production, especially in eastern Ukraine. Moreover, the dispute has resulted in shipping being halted from the Black Sea, from where about 90% of Ukraine’s grains are exported.

With respect to the Middle East and North Africa, it had stated that rising prices may lead to social tensions, especially in countries with weaker social safety nets, fewer job opportunities, limited fiscal space and unpopular governments. This extends to Egypt which imports about 80% of its wheat from Russia and Ukraine.  

Further, IMF noted that food pressures in Asia should be eased by local production and greater reliance on rice than wheat. “Costly food and energy imports will boost consumer prices, though subsidies and price caps for fuel, food and fertilizer may ease the immediate impact—with fiscal costs,” it said.

SERVICES AND TRAVEL 

World Bank also identified the global impact on services trade as last travel was deranged with airspace closures, travel restrictions, sanctions and increased fuel prices. Russia and Ukraine are among the top 10 countries for total global departures and a key source of revenue for tourism-reliant countries in Europe, East Asia and the Pacific, the Middle East, North Africa and South Asia.  

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“The war is likely to stall the post-pandemic recovery in international tourism, which was already anaemic from ongoing COVID-19 disruptions. A further intensification of geopolitical tensions could trigger a renewed decline in international tourism, which would likely be akin to the sharp fall and subsequent weak recovery from 9/11,” it noted.

COMMODITY TRADE 

The IMF says that broad supply-chain disturbance, in addition to increasing fuel prices, may also be resulting. Disruptions, sanctions and higher commodity prices also bear the potential of troubling global value chains. This may aggravate the ongoing strains and add to lengthen delivery times and high production costs for manufacturers across the globe, World Bank’s report mentioned.  

Although Russia and Ukraine combined account for less than 3% of global exports and less than 2% of global imports, the financial body adds, that the conflict and following sanctions have unravelled trade connectivity by disrupting transit routes, particularly for maritime container shipping and air freight traffic. Further, higher fuel prices and insurance premiums have pushed up shipping costs.  

Supply chains for high-value goods and critical components, including those of automotive and electronics, particularly bore the force of interference in the trade corridor between Europe and Asia. World Bank said the war has cut off European carmakers from supplying key parts such as wiring systems produced in Ukraine. This has stopped some assembly lines. Bottlenecks have also affected industries including food, construction, petrochemical and transport.

ENERGY TRADE 

Energy is the “main spillover channel” for Europe, with Russia being an important provider of natural gas. The World Bank stated that the price rise for European natural gas has been extremely sharp because of their restricted extra capacity, plus that of import and export terminals, and the limitation that natural gas must be transported as liquified natural gas. 

According to the IMF, economies relying on oil imports would see wider fiscal and trade deficits along with more inflation pressure. However, exporters in the Middle East and Africa may benefit from higher prices. In the long term, the war may fundamentally alter the global economic and geopolitical order should there be a recompose of supply chains, decentralization of payment networks, shifts in energy trade and countries rethink reserve currency holdings, it said. 

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During the ongoing tensions, unwillingness to buy Russian caused the price of Urals to trade at a discount of more than $20/bbl. in comparison to brent. “By late March, the price of Brent crude oil eased somewhat, to above $100/bbl., with the price falling after the United States announced plans to release from its reserves about 1 million barrels of oil per day over a period of six months,” World Bank states. On Monday, Brent crude fell 3% to below $100 for each barrel.  

According to the International Energy Agency, “Oil prices were already rising prior to the war alongside a rebound in demand that accompanied the global economic recovery and after supply concerns remerged when OPEC+ production fell short of expectations amid limited spare capacity”.

DEBT RESERVICING AND FINANCE  

In March, World Bank pointed to the existence of high debt among emerging markets and developing economies. As per its estimates, these economies account for about 40% of the global GDP. The dilemma for policymakers was to trade between containing inflation and preserving economic recovery post-pandemic. 

It added the geopolitical tensions “darkened the outlook” for developing countries that are major commodity importers or dependent on tourism or remittances. Citing the situation across Africa, it elaborated, that external borrowing costs are rising with bond spreads up by an average of 20 basis points. 

Further, the calculus has suddenly changed for countries with high debt, limited reserves and payments due in the near term, for example, Sri Lanka which was considering IMF funding to service its debt burden.  

Financial spill-overs are most likely to be felt in advanced economies with exposure to Russian financial assets, including some Italian, French and Austrian banks, according to World Bank. Their exposure to the sanctioned country’s economy is through business ties and local presence. “As a result, European bank stocks lost more than a fifth of their value since the onset of the war, but high capital adequacy and liquidity ratios have cushioned the impact,” the same report noted.  

https://www.cnbc.com/2022/04/21/from-food-to-inflation-the-russia-ukraine-war-has-a-global-impact.html

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