Opinion – Why? Economês in good Portuguese: Straight from Covid to war

How bitter are these new times with the face of old people. It is not the first time that the scourges of war and plague have come together in a devastating tsunami — the years 1918 and 1919 witnessed similar ordeal. But few expected a sinister repeat a hundred years later.

We barely got out of the war against Covid-19 (we don’t even know if the disease is already won among us, while some countries in Asia are still struggling to control the spread of the virus), and without refreshment we enter a military conflict of great proportions and with unfolding uncertain.

The scenario is worrying in so many dimensions that it is difficult to focus on the so-called economic consequences of the conflict. The humanitarian catastrophe is already of the first order and that is less than fifteen days before the start of the invasion. About 1.5 million refugees, hundreds of dead civilians, entire cities without water and energy, and who knows how many young soldiers fell to an irresponsible and even difficult to rationalize decision of Russian dictator Vladimir Putin.

War is, above all, bad for the economy. For the world economy and for the Russian economy as well. And not only in the short term, but also in the long term. Let’s start with the most obvious effects, and remembering that the pre-war and “post-Covid” scenario was shaping up as follows: economic activity recovering in the vast majority of countries, but with inflation on the rise due to a combination of stimulus excesses monetary and fiscal and Covidian disruption of the good functioning of global production chains.

In the developing world, central banks had been raising interest rates for some quarters in an attempt to curb the advance of inflation, while monetary authorities in the developed world had been withdrawing unconventional stimuli (such as purchases of public and private assets by banks central) and announcing that the zero interest period was about to end.

Withdrawing monetary and fiscal stimulus in times of a recovering economy and rising inflation is uncontroversial. When unemployment is low or down, and inflation is high, there is little doubt about which way to go. But war has great potential to affect this scenario.

The price of oil and food commodities soared strongly. And, it seems, with increasing pressure to cancel imports from Russia, they are likely to rise even further. These movements, known in economics as adverse supply shocks, not only put further pressure on inflation (remember, it is already very high around the world), but also bring down economic activity. This is the worst possible scenario for all of us: high unemployment and high inflation. It’s the specter of stagflation taking shape due to the insanity of the Russian government.

These are, of course, the immediate, global economic consequences. But let’s not forget the local catastrophe: Ukraine’s economy is paralyzed and devastated, its roads and other infrastructure are being destroyed; thousands of workers left factories and offices for the theater of war or exile (with dramatic effects on the supply of goods and services).

In Russia, the burden of Putin’s bellicose stupidity is also being felt. Currency depreciating, markets closed, possibility of a spot banking crisis, assets frozen abroad, companies forced to sell dollars to the federal government, strong sanctions on imports and exports of gas and oil in sight.

In a word, the country has plunged into the status of an international pariah and it is inevitable that it will pay dearly for this in economic terms. Whether the scarcity that will befall Russian society will be strong enough for Putin to be overthrown is anyone’s guess, but that ordinary citizens will feel their belts tightening more and more every day is beyond doubt: wars redirect resources that in times of peace they would be employed for the benefit of society, for other less praiseworthy uses.

War also affects the world’s long-term socio-economic well-being. First, for the obvious fact that we don’t know its duration. Second, because risk aversion has increased and will probably stay higher for a long time, due to the change in the prevailing geopolitical uncertainty: will there be more invasions? Will Putin be insane enough to escalate into nuclear conflict? Third, because military spending will grow in many countries, which means less spending in other priority areas and/or more taxes to be paid by society.

The peace dividends that benefited the world economy so much after the end of the Cold War are evaporating. The march of folly must be stopped. The alternative to sending soldiers and equipment to defeat the Russian invasion is a truly draconian set of sanctions. The world needs to close its doors to Russian exports of all kinds. And this is urgent. It will be considerably less costly than fighting Covid-19. Using less energy for a few months and paying more for it will bring less suffering than keeping the doors of factories and offices and schools closed for months on end. And what is at stake is not little.