Friday 18th March, 2022
60 Multiplier Effects/Economic Consequences of Russia's Invasion of Ukraine
The Bible is concerned with economic justice. Unfortunately like in news stories we watch on television,media devices, listen to or read, we hardly imagine the impact of news until it gets close to us experientially or geographically. In this post which precedes our earlier announced one (which will still follow this), we have compiled a comprehensive multiplier effect of the current Russian- Ukraine war from researched based policy analysis and commentaries from leading international economists on the global economy.
Will this crisis likely call for the need to reconsider the current interdependence of national economies to an independently sustainable new model?
'' An arrogant man stirs up strife,
But he who trusts in the Lord will prosper''. Proverb 28:25
''The righteous will see and fear,
And will laugh at him, saying,
“Behold, the man who would not make God his refuge,
But trusted in the abundance of his riches,
And was strong in his evil desire.” Psalm 52:6-7
'' I know the Lord will get justice for the poor and will defend the needy in court.'' Psalm 140:12
God acts in history to lift up the poor and oppressed.
60 Multiplier effects and Economic Consequences of Russia's Invasion of Ukraine
1. The economic and financial sanctions that have been implemented to date will lead to a deep recession in Russia; and nearly four in five consider that the fallout from the invasion will both reduce global growth and raise global inflation over the next year.
2. A total ban on oil and gas imports from Russia carries a high risk of recession in European economies.
3. The IGM Forum at Chicago Booth, which, for over a decade, has been regularly polling some of the world’s top economic experts in Europe and the US for their views on topical issues of public policy, believes there will be stagflationary in that it will noticeably reduce global growth and raise global inflation over the next year.
4. The economic and financial sanctions already implemented will lead to a deep recession in Russia.
5. Targeting the Russian economy through a total ban on oil and gas imports carries a high risk of recession in European economies.
6. Weaponizing dollar finance is likely to lead to a significant shift away from the dollar as the dominant international currency.
7., Karl Whelan at University College Dublin, who strongly agrees, says: “This is a classic negative supply shock. As we know from the 1970s, these shocks raise inflation and reduce output.”
8. Robert Shimer at Chicago, who says he is uncertain, accepts the diagnosis but not necessarily the outcome: “It’s an adverse supply shock. Whether that is inflationary depends on the monetary policy response.”
9. Larry Samuelson at Yale, who agrees with the statement, comments: “A protracted conflict, on top of existing supply-chain woes, will be detrimental to the world economy.”
10. Others who agree point to the likely drivers of lower growth and higher inflation. Christopher Pissarides at the London School of Economics (LSE) explains: “The effect will be through oil and other resources. Supply will be reduced so prices and production costs will rise.”
11. Franklin Allen at Imperial College London notes: “The invasion is affecting inflation already with oil, gas and many other commodities reaching high levels. Output may also fall.”
12. Markus Brunnermeier at Princeton adds: “The Russian economy is not large, but the increase in energy prices will have adverse effects on several emerging markets and the European Union”.
12. And Anil Kashyap at Chicago mentions: “Lots of disruptions, energy, neon, palladium (both important for chips), wheat.”
13. The promise of punishing sanctions in return by President Biden and the potential for Russian retaliation had already pushed down stock returns and driven up gas prices.
14. An outright attack by Russian troops could cause dizzying spikes in energy and food prices, fuel inflation fears and spook investors, a combination that threatens investment and growth in economies around the world.
15. However harsh the effects, the immediate impact will be nowhere near as devastating as the sudden economic shutdowns first caused by the coronavirus in 2020.
Russia is a transcontinental behemoth with 146 million people and a huge nuclear arsenal, as well as a key supplier of the oil, gas and raw materials that keep the world’s factories running. But unlike China, which is a manufacturing powerhouse and intimately woven into intricate supply chains, Russia is a minor player in the global economy.
16.Italy, with half the people and fewer natural resources, has an economy that is twice the size. Poland exports more goods to the European Union than Russia.
17. “Russia is incredibly unimportant in the global economy except for oil and gas,” said Jason Furman, a Harvard economist who was an adviser to President Barack Obama. “It’s basically a big gas station.”
19. Of course, a closed gas station can be crippling for those who depend on it. The result is that any economic damage will be unevenly spread, intense in some countries and industries and unnoticed in others.
20. Europe gets nearly 40 percent of its natural gas and 25 percent of its oil from Russia, and is likely to be walloped with spikes in heating and gas bills, which are already soaring. Natural gas reserves are at less than a third of capacity, with weeks of cold weather ahead, and European leaders have already accused Russia’s president, Vladimir V. Putin, of reducing supplies to gain a political edge.
21. And then there are food prices, which have climbed to their highest level in more than a decade largely because of the pandemic’s supply chain mess, according to a recent United Nations report. Russia is the world’s largest supplier of wheat, and together with Ukraine, accounts for nearly a quarter of total global exports. For some countries, the dependence is much greater. That flow of grain makes up more than 70 percent of Egypt and Turkey’s total wheat imports.
22. This will put further strain on Turkey, which is already in the middle of an economic crisis and struggling with inflation that is running close to 50 percent, with skyrocketing food, fuel and electricity prices.
23. And as usual, the burden falls heaviest on the most vulnerable. “Poorer people spend a higher share of incomes on food and heating,” said Ian Goldin, a professor of globalization and development at Oxford University.
24. Ukraine, long known as the “breadbasket of Europe,” actually sends more than 40 percent of its wheat and corn exports to the Middle East or Africa, where there are worries that further food shortages and price increases could stoke social unrest.
24. Lebanon, for example, which is experiencing one of the most devastating economic crises in more than a century, gets more than half of its wheat from Ukraine, which is also the world’s largest exporter of seed oils like sunflower and rapeseed.
Grain, oil seed prices soar in Ukraine
26. Political uncertainty and volatility weigh on economic and social activities
27. In the United States, the Federal Reserve is already confronting the highest inflation in 40 years, at 7.5 percent in January, and is expected to start raising interest rates next month. Higher energy prices set off by a conflict in Europe may be transitory but they could feed worries about a wage-price spiral.
“We could see a new burst of inflation,” said Christopher Miller, a visiting fellow at the American Enterprise Institute and an assistant professor at Tufts University.
28. Also fueling inflation fears are possible shortages of essential metals like palladium, aluminum and nickel, creating another disruption to global supply chains already suffering from the pandemic, trucker blockades in Canada and shortages of semiconductors.
29. The price of palladium, for example, used in automotive exhaust systems, mobile phones and even dental fillings, has soared in recent weeks because of fears that Russia, the world’s largest exporter of the metal, could be cut off from global markets. The price of nickel, used to make steel and electric car batteries, has also been jumping.
30. Financial turmoil. Global banks are bracing for the effects of sanctions intended to restrict Russia’s access to foreign capital and limit its ability to process payments in dollars, euros and other currencies crucial for trade. Banks are also on alert for retaliatory cyberattacks by Russia.
31. It’s too early to gauge the precise impact of an armed conflict, said Lars Stenqvist, the chief technology officer of Volvo, the Swedish truck maker. But he added, “It is a very, very serious thing. We have a number of scenarios on the table and we are following the developments of the situation day by day,” Mr. Stenqvist said.
32. The West has taken steps to blunt the impact on Europe if Mr. Putin decides to retaliate. The United States has ramped up delivery of liquefied natural gas and asked other suppliers like Qatar to do the same.
34. The demand for oil might add momentum to negotiations to revive a deal to curb Iran’s nuclear program. Iran, which is estimated to have as many as 80 million barrels of oil in storage, has been locked out of much of the world’s markets since 2018, when President Donald J. Trump withdrew from the nuclear accord and reimposed sanctions.
35. Some of the sanctions against Russia that the Biden administration is considering, such as cutting off access to the system of international payments known as SWIFT or blocking companies from selling anything to Russia that contains American-made components, would hurt anyone who does business with Russia. But across the board, the United States is much less vulnerable than the European Union, which is Russia’s largest trading partner.
36. Americans, as Mr. Biden has already warned, are likely to see higher gasoline prices. But because the United States is itself a large producer of natural gas, those price increases are not nearly as steep and as broad as elsewhere. And Europe has many more links to Russia and engages in more financial transactions — including paying for the Russian gas.
37. Oil companies like Shell and Total have joint ventures in Russia, while BP boasts that it “is one of the biggest foreign investors in Russia,” with ties to the Russian oil company Rosneft. Airbus, the European aviation giant, gets titanium from Russia. And European banks, particularly those in Germany, France and Italy, have lent billions of dollars to Russian borrowers.
“Severe sanctions that hurt Russia painfully and comprehensively have potential to do huge damage to European customers,” said Adam Tooze, director of the European Institute at Columbia University.
38. One result would be to push Russia to have closer economic ties to China. The two nations recently negotiated a 30-year contract for Russia to supply gas to China through a new pipeline.
“Russia is likely to pivot all energy and commodity exports to China,” said Carl Weinberg, chief economist at High Frequency Economics.
39. The crisis is also contributing to a reassessment of the global economy’s structure and concerns about self-sufficiency. The pandemic has already highlighted the downsides of far-flung supply chains that rely on lean production.
40. Now Europe’s dependence on Russian gas is spurring discussions about expanding energy sources, which could further sideline Russia’s presence in the global economy.
41. “In the longer term, it’s going to push Europe to diversify,” said Jeffrey Schott, a senior fellow working on international trade policy at the Peterson Institute for International Economics. As for Russia, the real cost “would be corrosive over time and really making it much more difficult to do business with Russian entities and deterring investment.”
42. The Russia-Ukraine conflict has triggered turmoil in the financial markets, and drastically increased uncertainty about the recovery of the global economy. Higher commodity prices intensify the threat of long-lasting high inflation which increases the risks of stagflation and social unrest. Certain sectors such as automotive, transport or chemicals are more likely to suffer.
43. Coface forecasts a deep recession of 7.5% for the Russian economy in 2022 and downgraded Russia’s risk assessment to D (very high).
44. European economies are most at risk: at the time of writing, Coface estimates at least 1.5 percentage point of additional inflation in 2022, while GDP growth could be lowered by 1 percentage point. Together with a complete cut of Russian natural gas supply, this could cost at least 4 points of GDP, thereby leading EU GDP growth close to zero – more probably in negative territory – in 2022.
45. While high commodity prices were one of the risks already identified as potentially disruptive to the recovery, the escalation of the conflict increases the likelihood that commodity prices will remain higher for much longer. In turn, it intensifies the threat of long-lasting high inflation, thereby increasing the risks of stagflation & social unrest in both advanced & emerging countries.
46. The crisis is obviously strongly impacting an already strained automotive sector due to various shortages and high commodity & raw material prices: metals, semiconductors, cobalt, lithium, magnesium…Ukrainian automotive factories supply major carmakers in Western Europe: some announced the stoppage of factories in Europe while other plants around the world are already planning outages due to chip shortages.
47. Airlines and Maritime freight companies will also suffer from higher fuel prices, airlines being the most at risk. First, fuel is estimated to account for about a third of their total costs. Second, European countries, the US and Canada have forbidden the access to their territories to Russian airlines and in turn, Russia has banned European and Canadian aircrafts from its airspace. This means higher costs since airlines will have to take longer routes. Eventually, airlines have little room for rising costs, as they continue to face lower revenues due to the impact of the pandemic.
48. Rail freight will also be impacted: European companies are forbidden to do business with Russian Railways which will likely disrupt freight activity between Asia and Europe, transiting though Russia.
49. We also expect feedstock for petrochemicals to be more expensive, and the soaring prices of natural gas to impact the fertilizer markets, hence the whole agri-food industry.
50. The Russian economy will be in great difficulty in 2022, falling into deep recession. Coface’s updated GDP forecast for 2022 stands at -7.5% after the recovery experienced last year. This has lead us to downgrade the country's risk assessment from B (fairly high) to D (very high).
50. Sanctions notably targets major Russian banks, the Russian central bank's, the Russian sovereign debt, selected Russian public officials & oligarchs, and the export control of high-tech components to Russia. These measures put considerable downward pressure on the Russian ruble, which has already plummeted, and will drive a surge in consumer price inflation.
51. Russia has built up relatively strong financials: a low level of public external debt, a recurrent current account surplus, as well as substantial foreign reserves (app. USD 640 bn). However, the freeze imposed by western depositary countries on the latter prevents the Russian central bank from deploying them and reduces the effectiveness of the Russian response.
52. The Russian economy could benefit from higher prices for commodities, especially for its energy exports. However, EU countries announced their intention to limit their imports from Russia. In the industrial sector, restricted access to Western-produced semiconductors, computers, telecommunications, automation, and information security equipment will be harmful, given the importance of these inputs in the Russian mining and manufacturing sectors.
53. Because of its dependence on Russian oil & natural gas, Europe appears to be the region most exposed to the consequences of this conflict. Replacing all Russian natural gas supply to Europe is impossible in the short to medium run and current price levels will have a significant effect on inflation. At the time of writing, with the barrel of Brent trading above 125$ and natural gas futures suggesting prices durably above 150€/Mwh, Coface estimates at least 1.5 percentage point of additional inflation in 2022 which would erode household consumption and, together with the expected fall in business investment and exports, lower GDP growth by approximately one percentage point.
54. While Germany, Italy or some countries in the Central and Eastern European region are more dependent on Russian natural gas, the trade interdependence of Eurozone countries suggests a general slowdown.
55. On top of that, we estimate that a complete cut of Russian natural gas flows to Europe would raise the cost to 4 percentage points in 2022, which would be bring annual GDP growth close to zero, more probably in negative territory – depending on demand destruction management.
56. In the rest of the world, the economic consequences will be felt mainly through the rise in commodity prices, which will fuel already existing inflationary pressures. As always when commodity prices soar, net importers of energy & food products will be particularly affected, with the spectre of major supply disruptions in the event of an even greater escalation of the conflict.
57. The drop in demand from Europe will also hamper global trade.
58. In Asia-Pacific, the impact will be felt almost immediately through higher import prices, particularly in energy prices, with many economies in the region being net energy importers, led by China, Japan, India, South Korea, Taiwan and Thailand.
59. As North American trade and financial links with Russia and Ukraine are fairly limited, the impact of the conflict will mainly be felt through the price channel and through the slowdown of the European growth.
60. Despite the prospect of slower economic growth and higher inflation, the recent geopolitical events are not expected to derail monetary policy in North America at this stage.
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