WASHINGTON (AP) – Moscow’s war against Ukraine and the fierce financial reaction it unleashed not only caused an economic catastrophe for President Vladimir Putin’s Russia. The consequences also threaten the global economy, shake up financial markets and make life more dangerous for everyone from Uzbek migrant workers to European consumers to hungry Yemeni families.
Even before Putin’s troops invaded Ukraine, the world economy was strained under a number of burdens: rising inflation. Intricate supply chains. Falling stock prices.
The crisis in Ukraine has simultaneously increased any threat and complicated potential solutions.
“We’re actually in unexplored territory,” said Clay Lowry, executive vice president of the Institute of International Finance, a trade group of global banks. “We know there are consequences we can’t foresee.”
At least for now, the damage to the overall global economy seems relatively minor, if only because Russia and Ukraine are not economically powerful centers. As important as exporters of energy, precious metals, wheat and other commodities are, they together account for less than 2% of the world’s gross domestic product. Most large economies have only limited trade exposure to Russia: for the United States, this is 0.5% of total trade. For China about 2.4%.
With the exception of a major escalation of the war – far from impossible – “the effects on the United States, China and much of the emerging world must be limited,” said Adam Slater, a leading economist at Oxford Economics. He predicts only a 0.2% drop in world GDP this year.
However, Russia is a vital supplier of oil, natural gas and metals, and higher prices for these goods are sure to cause economic damage around the world. Europe relies on Russia for nearly 40% of its natural gas and 25% of its oil. For the European continent, Russia’s war has significantly increased the likelihood of rapid inflation, another economic crisis – or both.
Here’s a deeper look:
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ECONOMIC SIEGE
Enraged by Putin’s aggression, the United States and other Western nations have turned to Russia with unprecedentedly broad and severe sanctions on a major economy. They have expelled major Russian banks from the international payment system SWIFT, restricted high-tech exports to Russia and severely restricted Moscow’s use of its foreign exchange reserves.
The rapid and united international revenge against Russia seems to surprise the Putin regime.
“The world – or most of it – is putting an economic siege on Russia,” wrote Karl Weinberg, chief economist at High Frequency Economics.
The sanctions quickly damaged. The Russian ruble fell to a record low on Monday. Depositors lined up in front of ATMs to try to withdraw their money from the troubled banking system. Detached from Google Pay and Apple Pay, the Russians were stuck in the ticket booths of the subway railways.
The Institute of International Finance predicts that the Russian economy will double-digit this year, even worse than its 7.8% decline in the year of the Great Recession in 2009.
Oxford Economics said evidence of wars ranging from the Iran-Iraq war of 1980-1988 to NATO bombing of Serbia in 1999 suggests a staggering 50% to 60% collapse in the Russian economy.
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DIFFICULT TIMES FOR EUROPE
Due to its dependence on energy from Russia, the European economy is now particularly threatened.
Natural gas prices have risen by 20% since the start of the war, in addition to earlier increases, and are now approximately six times higher than in early 2021. The gas price shock fuels higher inflation and the increase in utility bills. As a result, households have less money to spend, and hopes of a jump in consumer spending as a result of fewer pandemic restrictions and COVID-19 cases have diminished.
Rising gas prices have triggered what economists call “demand-wasting” among industrial enterprises, such as fertilizer producers who use a lot of gas and have now reduced production. Farmers pay more to drive machinery and buy manure. Germany’s economy, which fell 0.7% in the fourth quarter of 2021, will face a technical recession if it shrinks again in the first three months of 2022.
The economic downturn can be offset by an increase in German defense spending. In response to the Russian invasion, Chancellor Olaf Scholz said the government would allocate 100 billion euros ($ 111 billion) to a special fund for its armed forces and increase defense spending by more than 2% of GDP.
“The impact of higher prices and the negative impact of confidence could reduce real GDP growth in the euro area from 4.3% to 3.7% in 2022,” said Holger Schmiding, chief economist at Berenberg bank.
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NO RELIEF ON THE SUPPLY CHAIN
The unexpectedly stable recovery of the world from the pandemic recession has forced companies to struggle to find enough raw materials and components to produce goods to meet growing customer demand. Congested factories, ports and freight plants mean shortages, delays in deliveries and higher prices. Interruptions in Russian and Ukrainian industry may delay any return to normal.
Mark Zandi, chief economist at Moody’s Analytics, noted that Russia and Ukraine together produce 70% of the world’s neon, which is important in semiconductor production. This is particularly worrying because the world, and in particular car manufacturers, are already experiencing a shortage of computer chips.
When Russia seized Crimea from Ukraine eight years ago, neon prices jumped 600 percent, although Zandi noted that since then, chipmakers have stored neon and sought alternatives to Russian supplies.
Russia and Ukraine together supply 13% of the world’s titanium, which is used to make passenger planes, and 30% of palladium, which goes to cars, cell phones and dental fillings, Zandi said. Russia is also a major producer of nickel, used to make batteries for electric cars and steel.
“It’s impossible to catch up,” said Vanessa Miller, a partner at Foley & Lardner LLP, which specializes in supply chains.
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QUALITY PROBLEM
Conflict and sanctions will also damage Russia’s neighbors in Central Asia. As its own workforce grows older, Russia has turned to younger migrant workers from countries such as Uzbekistan and Tajikistan. The families of these workers began to rely on the money they sent home – remittances.
Even in the midst of COVID-19 in 2020, remittances from Russia to Uzbekistan exceeded $ 3.9 billion and to Kyrgyzstan $ 2 billion, according to Russia’s central bank.
“The pressure on the ruble, bank restrictions on foreigners and – in the long run – the collapse of Russia’s labor market will have an immediate and profound economic impact on Central Asia,” Gavin Helf, a Central Asia expert at the US Peace Institute, wrote this week. .
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DIRECTION OF FOOD SUPPLIES
Ukraine and Russia account for 30% of world exports of wheat, 19% of corn and 80% of sunflower oil, which is used in the food industry. Much of the Russian and Ukrainian awards go to poor, volatile countries such as Yemen and Libya.
The threat to farms in eastern Ukraine and the disruption of exports through Black Sea ports could reduce food supplies just when prices are at their highest levels since 2011 and some countries are suffering from food shortages.
Anna Nagarney, a professor of management at the University of Massachusetts Amherst, described the consequences as “extremely worrying”.
“Wheat, corn, oil, barley, flour are extremely important for food security,” Nagarney said, “especially in the poorer parts of the globe.”
With closed ports, airports and railways, and young Ukrainians battling the Russian invasion, she asked, “Who will harvest? Who will do the transport? “
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GROWING PRICES
The war in Ukraine coincides with a high-risk moment for the Federal Reserve and other central banks. They have been caught unprepared by the rise in inflation over the past year, largely as a result of the unexpectedly strong economic recovery.
In January, consumer prices in the US rose 7.5% from a year earlier, the biggest such jump since 1982. In Europe, Wednesday’s data is likely to show that inflation accelerated to 6% last month from 5.1 % in January for the 19 countries that use the euro.
Now the fighting and sanctions, which have disrupted Russia’s trade with the global economy, threaten to raise prices, especially energy: Russia and Ukraine, Zandi said, together produce 12% of world oil and 17% of natural gas.
To fight inflation, the Fed will start raising interest rates when it comes together in two weeks, reversing the ultra-low interest rate policies it adopted in 2020 to help save the economy from a pandemic recession. Similarly, the European Central Bank is gradually withdrawing its efforts to stimulate the pandemic.
But now? Central bankers must assess the growing inflationary pressures against the risk of the crisis in Ukraine weakening economies. In Europe so far, “there are no hints of rising interest rates,” said Carsten Brzeski, head of global macros at ING Bank.
Yet the Fed, rudely accused of slowly acknowledging the resurgence of inflation, may continue to deviate from easy money policies.
With the exception of a stock market crash or an expansion of the war outside Ukraine, Zandi said: “I do not expect any change in the Fed’s monetary policy as a result of the economic crossroads created by the Russian invasion of Ukraine.
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McHugh reported from Frankfurt, Germany. AP New York writer Ken Sweet contributed to this report.
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