The Donbas area of Ukraine, comprising two breakaway regions, Luhansk and Donetsk, is held by the Russian separatist. This region is bordering Russia. Putin has said many times in the past and reiterated that as a former soviet republic Ukraine shares deep social, cultural, and ethnic ties with Russia. On Tuesday, February 23, Russia has moved its military into the Donbas area as a ‘peacekeeping-forces’. The US and the EU termed a ‘peacekeeping’ in eastern Ukraine as ‘nonsense’. After a full-fledged Ukraine evasion on February 24, Putin addressed the nation that the purpose of the attack was to ‘defend people who have been victims of abuse and genocide’. This invasion can not be justified on the liberty and the sovereignty principles but this article limits itself to the economic spill overs of the War only.
The global economy has struggled to balance growth and price stability for the last two years in the wake of the Covid-19 pandemic. According to January 2021’s Global Economic Prospects, the economy contracted 4.3 percent in 2020. Many low-income countries’ GDP has squeezed in the range of 10-20 %. For example, in Macao SAR, China has depleted its economic output by a record 54 %. In the last two years, poor economic activities have plunged millions of families into poverty. The financial crisis has amplified debt concerns in emerging markets and developing economies. The global debt rose to 256 % of GDP in 2020, a rise of 28 % in GDP viz-a-viz 2019.
Although the global economy showed a good recovery in 2021, it was afflicted with higher commodity prices and short supplies. Inflation has soared to a multi-year high, it appears, which will persist long-lasting. The energy prices are in a rising trend. Natural gas prices have increased to a level of more than twice in the last two years, from an average of $2.03in 2020 to an average of $ 4.53 an Mcf in 2022. The Brent crude oil surpassed the $100 mark.
Following the Russian announcement to move military into eastern Ukraine invited many economic sanctions declared by the west. A sanction is a penalty imposed by one country on another, often to deter her from any aggression on another country or to break the international rule of law.
So far as the first tranche of sanctions, the EU and the US have primarily imposed sanctions that intend to hurt Russia’sability to finance war and impede its global economic projects. The sanctions include: two state-owned banks (VEB and Russia’s military bank) will not be able to do business with the US, peoples in Putin’s inner circle are banned, American firms are forbidden from doing business in the Donbas region, deals related to Russia’s national debt not allowed.
Along with the 27 Russian nationals, the EU has banned access to the European capital market, trade with the Luhansk and Donetsk, and cut off access to the European financial system. Olaf Scholz, the chancellor of Germany, has halted the Nord Stream 2, a dream project of the Russian state-owned company Gazprom.
Russia is the world’s second-largest producer of natural gas and crude oil. It produces 10-12 % of global crude oil production. Similarly, its natural gas reserves account for 24 % of the world’s total gas reserves of 6923 Tcf. It is the largest exporter of natural gas globally and supplies metals such as Nickel, Aluminum, and steel to the world. Russia and Ukraine contribute to the global food security in wheat and maize production.
Oil experts say there is a possibility it could cause crude oil prices to climb as much as 20-30 % a barrel. The halt of Nord Stream 2 would fuel up natural gas prices in Europe.
On February 24, 2022, Russia announced a full-scale Ukraine invasion. Following the attack, the US and Europe have sought emergency meetings of the United Nations. The west might announce the second tranche of harsh sanctions against Russia. If trade related to fossil fuels – petroleum products, coal, natural gas, and crude oil are banned, it would have devastating effects on global commodity prices, further boosting already spiraled up inflation. The Ukrainian president is demanding to ban Russia from SWIFT with other harsher sanctions. Which seems inevitable looking at the west’s commitment to support Ukraine. This ban will add fuel to the fire to worsen global trade.
What is worrisome is that global inflation is already touching new highs. In the US, the consumer price index has already spiked up to 7.5 % in Feb 2022, the most significant annual gain in the last 40 years. The inflation is higher than 5 % in the EU zone. According to a World Bank report, in 78 out of 109 EMDEs (Emerging Markets and Developing Economies), annual inflation confronts more than 5%. Inflation is spiked more markedly and persisting more stubbornly globally. A complex nexus of preexisting conditions and war-inflicted global worries, including short supplies of oil, gas, grain, and metals, would swell prices of commodities which will fuel global inflation to newer highs.
The unprecedented mix of pandemic-create recessionary economic scenarios, global inflation, and war-like situations has perplexed central banks and many governments of the world. Russia Ukraine war is adding salt to the wound so far as the world’s economy is concerned.
Many banks that have set a pretext for a policy rate hike in the last six months are in a dilemma to make decisions. The Increase in policy rates may not turn into a diminished inflationary pressure. Since, for the most part, they are supply-linked. But hiked policy rates would slow down nascent economic recovery for sure. If continued for more extended periods and not resolved in a diplomatic manner, it appears the newly added challenges would push the global economy into a severe economic recession with a higher inflationary regime.
