War in Ukraine: Could financial sanctions on Russia push the world into recession?

Could the new round of financial sanctions on Russia send the world back into recession less than two years after the global economy contracted as a result of the Covid-19 pandemic?

Analysts at the moment assess that it is not. But they believe the economic retaliation for Vladimir Putin’s invasion of Ukraine is likely to have negative consequences for the very countries imposing the sanctions and the global economy as a whole.

Under severe stress, the Russian financial system may not be able to meet its obligations, warned the bank JP Morgan in a report on Monday (28/2). This would have consequences for financial institutions in other countries, creditors of Russian debt.

In addition, the new round of sanctions maintains pressure on the price of commodities such as oil, natural gas, wheat and corn, with an additional impact on global inflation that was already under pressure from the effects of the pandemic.

According to Sergio Vale, chief economist at MB Associados, this scenario may lead central banks around the world to raise interest rates more quickly, in an attempt to contain an escalation of inflation.

With more interest, the global economy tends to grow less than the 4% to 4.5% previously expected by international organizations such as the IMF (International Monetary Fund) and the World Bank.

In Brazil, exports could be affected if this whole scenario results in lower growth in China, Vale assesses.

And, with additional inflationary pressures, the Central Bank of Brazil may be led to raise the Selic (Brazilian economy’s basic interest rate) above the 12.25% currently expected, increasing the chances of a recession in 2022 for a GDP that has already was expected close to zero.

Financial sanctions imposed on Russia

The European Union, the United States, the United Kingdom and other countries over the weekend announced an unprecedented set of financial sanctions on Russia in response to the country’s invasion of Ukraine.

Among the measures are the exclusion of Russian banks from the Swift international financial transfer system and the freezing of a large part of the Central Bank of Russia’s reserves held abroad.

The sanctions are intended to push the Russian economy into recession, putting pressure on public opinion against Putin’s military action in the neighboring country.

As a result of the new wave of economic retaliation, the Russian ruble collapsed on Monday (28/2), losing 30% of its value against the dollar. To contain the fall, the Russian monetary authority raised the local base interest rate from 9.5% to 20%.

Amid fears of restrictions on withdrawals, queues have formed at banks and ATMs in Russia. The Russian Central Bank, however, urged calm and said it had “the necessary resources and tools to maintain financial stability”.

“This set of sanctions is hitting ordinary Russians in a way that previous sanctions didn’t and people are now becoming aware of it,” says Chris Weafer, chief executive of Moscow-based consultancy Micro-Advisory.

“People are much more afraid. There is already talk that some companies will have to reduce working hours or even suspend production because they cannot access important parts of the West due to sanctions or trade limitations, so there is a great deal of concern on the streets.” , reports the analyst.

Possible impacts of sanctions

By Simon Jack, Business editor at BBC News

Banning Russian banks from the Swift international transfer system could have side effects for companies and financial institutions that have money receivable from Russian counterparties.

In 2018, the United States imposed restrictions on the use of the Swift system by Iranian banks, but it was a much smaller economy than the Russian one and, at the time, the measure faced opposition from several European governments.

Germany is in a particularly sensitive position in the current scenario, as it depends on Russia for around two-thirds of its natural gas needs. Thus, the country imposed a sacrifice on itself, by suspending the certification of the Nord Stream 2 gas pipeline, built to transport gas from Russia to Germany.

Authorities in the United States, Europe and the United Kingdom hope to minimize the effects of sanctions on their own economies by allowing Russian international financial transactions linked to the energy and food sector to continue. But how this filtering will be done is still unclear.

While the deletion of the Swift system is likely to have a strong impact for Russia, there is an alternative system called SPFS (acronym for Financial Message Transfer System), created by Russia after the Crimean crisis in 2014.

China also has a secondary system called CIPS, or Cross-Border Interbank Payment System.

Effects on inflation, world economy and Brazil

For Sergio Vale, chief economist at MB Associados, the main risk of the “economic war” against Russia continues to be that of greater inflationary pressure that leads central banks around the world to a more energetic hike in interest rates.

“These are sanctions on a country that has a fragile economic weight, but which has a relevant weight in commodities”, observes Vale.

This Monday, wheat futures contracts on the Chicago Stock Exchange rose by 3.7%, corn by 3% and soybeans by 2.5%. Russia and Ukraine account for about 29% of global wheat exports, 19% of corn supply and 80% of world sales of sunflower oil, which competes with soybean oil.

Brent oil, on the other hand, surpassed US$ 105 per barrel at the beginning of trading this Monday, later amortizing the rise to US$ 101. WTI oil, a reference for the American market, hit US$ 99 a barrel. , then going to $95.

“We are putting an inflationary shock on top of an already very pressured inflation in Brazil, the United States and Europe. This poses important difficulties for the conduct of monetary policy”, assesses the analyst.

For Vale, the economic suffocation of Russian financial institutions via exclusion from the Swift system could result in defaults and bank failures, but the impact of this on the world economy is limited.

“The rapid and intense asphyxiation can kill many of the Russian banks, because a ‘nuclear weapon’ was used, which is the Swift system. But we are not talking about China, the USA or Europe, there is no impact to generate a global recession”, he says.

According to the analyst, another consequence may be a more active search by European countries for the energy transition, aiming at less dependence on oil and natural gas and on Russian exports.

For Vale, the possibility of a global recession would only become more palpable if the conflict becomes generalized, leaving the restricted sphere of Ukraine, if Russia feels empowered to extend its action towards other countries.

But, given the response of countries to the invasion of Ukraine and the warning power of the severe financial sanctions imposed, the economist believes that this escalation is unlikely for the time being.

“Ukraine war can take away growth points [da economia mundial em 2022], due to the impact of inflation and interest. It is likely that we will slide towards growth that is below the 4% to 4.5% estimated by the IMF and World Bank, to something closer to 3% to 3.5%. But we’ll still need to see additional impacts.”