explained | The impact of the Russia-Ukraine conflict on the global economy

The ongoing conflict between Russia and Ukraine will reportedly have a major impact on the global economy, which is currently recovering from the stress of the coronavirus pandemic.

The International Monetary Fund (IMF) previously reported that Russia and Ukraine are both major commodity producers, and disruptions there have resulted in increased global prices, particularly of oil and natural gas. Food prices have also jumped, with Ukraine and Russia accounting for up to 30% of global wheat exports. The IMF said the entire global economy will feel the effects of slowing growth and high inflation.

The World Bank in its Spring 2022 economic update for Europe and Central Asia also said the conflict dealt a second major blow to the global economy in two years and caused humanitarian catastrophe. “Even before the war, the global recovery was already easing as geopolitical tensions intensified, COVID-19 continued to flare up, macroeconomic support eroded, and supply bottlenecks increased,” it said. noted.

poverty and hunger

The World Bank’s baseline projection assumes that Ukraine’s poverty, based on a threshold rate of $5.50 per day, will increase from 1.8% in 2021 to 19.8% in 2022. It said that the model developed by the United Nations suggested that there could be a more serious and prolonged war. The cause of poverty affects about 30% of the population. Citing estimates from the authors of the Center for Global Development blog, the World Bank said the latest increase in food prices could push an additional 40 million people below the $1.90-a-day poverty line.

The IMF echoed similar concerns. It said in March that, “rising prices for food and fuel could pose a higher risk of unrest in some regions from sub-Saharan Africa and Latin America to the Caucasus and Central Asia, while food insecurity in some parts of the world.” There is potential to increase further. of Africa and the Middle East.” The conflict disrupted Ukraine’s planting and harvest seasons, destroying vital areas, shops, infrastructure and production, particularly in eastern Ukraine. In addition, the conflict has resulted in the suspension of shipping from the Black Sea, from where about 90% of Ukraine’s grain is exported.

With regard to the Middle East and North Africa, it said rising prices could lead to social tensions, especially in countries with weak social safety nets, low job opportunities, limited financial space and unpopular governments. This extends to Egypt which imports about 80% of its wheat from Russia and Ukraine.

In addition, the IMF said that local production and a greater reliance on rice than wheat should ease food pressure in Asia. “Expensive food and energy imports will drive up consumer prices, although subsidies and price limits for fuel, food and fertilizer may reduce the immediate impact – but with fiscal costs,” it said.

energy trading

Energy is the “main spillover channel” for Europe, with Russia being a major provider of natural gas. The World Bank noted that growth in European natural gas prices has been particularly sharp due to their limited spare capacity, which includes import and export terminals, and the constraints that natural gas can be transported as liquefied natural gas. needed.

According to the IMF, economies dependent on oil imports will see greater inflationary pressures along with wider fiscal and trade deficits. However, exporters from the Middle East and Africa may benefit from higher prices. In the long term, the war could fundamentally alter the global economic and geopolitical order, restructuring supply chains, fragmentation of payment networks, shifting energy trade and requiring countries to reconsider reserve currency holdings, it said.

During the ongoing tensions, the reluctance to buy the Russians caused the Urals to trade at a discount of more than $20/bbl. Compared to Brent. “By the end of March, the price of Brent crude oil eased somewhat to above $100/bbl, following the announcement of plans by the United States to release approximately 1 million barrels of oil per day over a six-month period. With the fall,” the World Bank says. Brent crude fell 3% for every barrel on Monday to fall below $100.

According to the International Energy Agency, “a rebound in demand with a global economic recovery as well as oil prices were rising before the war and after supply concerns when OPEC+ production fell short of expectations amid limited excess capacity.” had gone”

commodity trading

The IMF says that apart from rising fuel prices, widespread disruptions in the supply-chain could also be the result. Disruptions, sanctions and high commodity prices also have the potential to upset global value chains. This could add to ongoing stress and add to longer delivery times and higher production costs for manufacturers around the world, the World Bank report noted.

Although Russia and Ukraine combined account for less than 3% of global exports and less than 2% of global imports, the financial body says, the conflict and subsequent sanctions have worsened trade connectivity by disrupting transit routes Traffic, especially for sea container shipping and air freight. In addition, higher fuel prices and insurance premiums have pushed up shipping costs.

Supply chains for high-value goods and critical components, including automotive and electronics, bore the brunt of disruptions, particularly in the trade corridor between Europe and Asia. The war has prevented European carmakers from supplying key parts such as wiring systems manufactured in Ukraine, the World Bank said. It has clogged some assembly lines. The bottlenecks have also affected industries including food, construction, petrochemical and transportation.

Services & Travel

The World Bank also pointed to the global impact on services trade as outbound travel was disrupted due to airspace closures, travel restrictions, restrictions and rising fuel prices. Russia and Ukraine are among the top 10 countries for total global departures and are a major source of revenue for tourism-dependent countries in Europe, East Asia and the Pacific, the Middle East, North Africa and South Asia.

“The war is likely to stall the post-pandemic recovery in international tourism, which was already anemic from the ongoing COVID-19 disruptions. A further intensification of geopolitical tensions could lead to a renewed decline in international tourism, which will likely equate to a sharp decline from 9/11 and a weak recovery after,” it noted.

Debt Protection and Finance

In March, the World Bank pointed to the existence of high debt among emerging markets and developing economies. According to its estimates, these economies account for about 40% of the global GDP. The dilemma for policymakers was to make a tradeoff between controlling inflation and sustaining the economic recovery after the pandemic.

This “darkened the outlook” of geopolitical tensions for developing countries, which are major commodity importers or rely on tourism or remittances. It elaborated, citing the situation across Africa, with external borrowing costs rising with bond spreads of 20 basis points on average.

Furthermore, the calculus has changed abruptly for countries with high debt, limited reserves and near-term payments due, for example Sri Lanka which was considering IMF funding to meet its debt burden.

According to the World Bank, financial spill-overs are most likely to be felt in advanced economies exposed to Russian financial assets, including some Italian, French and Austrian banks. Their exposure to the sanctioned country’s economy is through trade links and local presence. “As a result, European Bank shares have lost a fifth of their value since the start of the war, but the high capital adequacy and liquidity ratio have mitigated the impact,” the same report said.