Russia's war on Ukraine casts a shadow over the global economy

The Russian war on Ukraine has had repercussions on the global economy, and there are changes that will take place. The Ukrainian economy has contracted, and Russia is reeling under the weight of economic sanctions, and is effectively cut off from the global financial system.

Adam Tosi says in an article he wrote in the American magazine "Foreign Policy" that the European Union also has to deal with a great state of uncertainty regarding both energy supplies and prices, as gas prices have recently fluctuated by up to 70% in one day.

The article refers to the assertion of economists that if German imports of gas are cut off, which is a clear possibility now, the economy may shrink by between 2 and 4%, and this will be a recession similar to the “Covid-19” crisis.

Change in the global economy

For NATO-West relations with Moscow, Russian President Vladimir Putin's war on Ukraine is clearly a historic turning point, and the atrocities committed in occupied Ukrainian communities represent a horrific violation of international law, but does Putin's war represent a change in the development of the global economy?

Most notable about the war is, after all, Russia's military frustration, and given Russia's performance, it is not at all clear why some, even those who were once considered allies of Putin, would like to associate themselves more closely with his regime.

What requires more immediate attention than long-term prognosis is the deluge of shock that the war has wrought in various spheres of the global economy, from the combatants, the broader region of Eastern and Central Europe, to global energy and food markets, and one enduring story of this war may be the way Europe unleashes Its next stage of integration.

However, it is important to note that some of the deeper and more significant economic impacts are being felt far beyond the battlefield, and if the war, coupled with the uneven recovery from COVID-19, rising inflation, and monetary tightening, add to an already unfavorable environment for countries' economies Fragile and debt-burdened low-income and emerging market economies.

As for the future shape of the global economy, how the world deals with the debt crises caused by this war, as far apart as Sri Lanka and Tunisia, is likely to be at least as important as Russia's desperate efforts to circumvent sanctions in its trade with China and India.

repercussions of war

Ukraine's economy shrank by 16% in the first quarter of 2022 compared to the first quarter of last year, and may drop by 40% by the end of the year, and it will have to rely on foreign aid to survive.

Russia is reeling under the weight of dramatic economic sanctions, and while energy trade continues, it is effectively cut off from the global financial system.

Perhaps the exchange rate of the ruble (the local currency of Russia) nominally recovered and returned to its pre-war level.

But its actual market value is speculative, there is no longer a free market in rubles or Russian financial assets, and the Kremlin will be lucky if production shrinks by just 10% this year.

The withdrawal of Western companies from Russia has exacerbated the shock, and even if a ceasefire is reached, the prospects for Russia's long-term development are already bleak.

Away from both sides of the war, Europe will have to absorb a massive influx of refugees, and the European Union will also have to deal with great uncertainty regarding both energy supplies and prices. Gas prices have recently fluctuated by as much as 70% in a single day. .

Economists estimate that if German imports of gas are cut off, which is a clear possibility now, the economy could shrink by between 2 and 4%, and that would be a recession similar to the “Covid-19” crisis.

Germany is a rich country, and even in the event of a severe recession, it will have the resources to deal with it, and its eastern European neighbors will be in a more difficult situation, they have lower incomes, they absorb the majority of refugees and they are more dependent on Russia for trade and energy and will seek help from their partners the richest in the European Union.

Italian Prime Minister Mario Draghi has been pressing since the start of the war for a collective spending package to ease the crisis, accelerate investments in energy independence, and bolster Europe's defenses that could amount to more than $1.5 trillion. A giant leap forward for the EU, it will require months of high-stakes diplomacy to negotiate.

Europe is committed to weaning off its dependence on oil and gas imported from Russia, and in the medium term we hope the crisis will accelerate the push towards renewable energy and away from global trade in fossil fuels.

But in the short term, the effect is not de-globalization but the search for new sources of supply. LNG carriers from all over the world are making their way to terminals in France and Spain. German Economy and Climate Minister Robert Habeck recently signed an agreement with Qatar.

supply chains

Even if Europe succeeds in reducing its consumption of fossil fuels as quickly as planned, this will require new imports of solar panels and rare earth elements to build battery systems.

At the same time, what both the US Federal Reserve and the European Central Bank will focus on is controlling the problem of rising prices.

In addition to the disruption to global supply chains caused by Covid-19, they are now facing a sharp rise in energy prices and tight commodity markets in general.

Medium- and long-term inflation expectations are rising, bond markets and voters are calling for action, and a round of interest rate hikes is now inevitable.

interest rates

Against the backdrop of years of low or zero interest rates, and with debt levels reaching historical highs, any interest rate increase is a delicate process, and will put pressure on debt-laden governments and companies, and the impact will be felt around the world.

For all the stress that Europe and the United States face, they have wealth that ultimately means that any stress from the shock of the Ukraine war can be mitigated through public spending.

As demonstrated by the COVID-19 pandemic, rich countries have the means, if necessary, to support large parts of the workforce for months on end.

By contrast, the trade-offs with emerging markets and low-income countries, especially those with huge debt denominated in dollars or euros, is more painful.

The Federal Reserve and the European Central both announced this year that they are tightening monetary policy and raising interest rates.

So far, it is recognized that interest rate hikes have been modest, and yields on long-term borrowing rise more slowly than on short-term loans.

But the direction of the intent is clear. The era of zero rates or even negative rates is over. In addition, rising energy and food prices present a major challenge to heavily indebted countries.

Currently, the World Bank warns that the number of countries facing imminent risk of debt distress has risen to 35, and that as many as 12 countries may not be able to make debt payments by the end of the year.

The UNDP list of countries at risk of immediate debt problems includes Belize, Grenada, Angola, Laos and Gabon, all of which have significant debt owed by private creditors.