Opinion – Why? Economês in Portuguese: How the war in Ukraine is affecting the global economy

In addition to the deaths and destruction, Russia’s invasion of Ukraine, since its inception less than a month ago, has impacted the entire global economy, resulting in slower growth and higher inflation. Higher prices for household food and fuel will hit the poorest in particular.

As a result of the external sanctions on Russia – the isolation of its central bank and the exclusion of some of its banks from the Swift international payment system, as well as the holding of assets of Russian oligarchs abroad, the sanctions voluntarily applied by external private agents and the ban on technological products imported by the country – its GDP is expected to drop by at least 15% this year. The neighboring economies of Ukraine and Russia are experiencing disruptions to trade, disruptions in supply chains and slumps in migrant remittances, as well as having to deal with a contingent of refugees from Ukraine that now exceeds 3 million.

The immediate impacts of the war elsewhere are taking place through three transmission channels. First, there is an effect on finance, as declining business confidence and heightened investor uncertainty have negatively affected asset prices, tightening financial conditions. It was feared that the war could even lead to capital outflows from areas considered sensitive to risk premium rises, such as several emerging and developing countries, or at the very least to the sale of their securities to pay investors in withdrawing funds with exposure to Russia.

On the other hand, after weeks of apprehension, volatility indices appear to have stabilized since last week, in part because doubts about the direction of monetary policy by the Fed (the Federal Reserve, the U.S. central bank) eased at the end of the meeting. its monetary policy committee last week. It helps that an eventual default on part of Russia’s external debt does not seem to represent a source of systemic risk in global finance.

Second, there is also a price shock for energy and food commodities around the world, increasing levels of inflation and reducing the purchasing power of populations, with effects on aggregate demand and growth in countries. After all, Russia and Ukraine are major commodity producers and the disruptions have caused global prices to skyrocket, especially for oil and natural gas. Food costs have increased, particularly with the price reaching record levels for wheat, for which Ukraine and Russia account for 30% of global exports.

Economies dependent on oil imports will see wider fiscal and trade deficits and more inflationary pressure, although some exporters, such as those in the Middle East and Africa, could benefit from higher prices. Sharper increases in food and fuel prices could increase the risk of social unrest in some regions, from Sub-Saharan Africa and Latin America to the Caucasus and Central Asia, while food insecurity is likely to increase further in parts of Africa and the Middle East.

A third transmission channel will be via a new round of restrictions on supply chains. Russia is also a significant supplier of fertilizers, palladium, aluminum and other products that could be affected by logistical constraints brought on by military conflicts, sanctions and voluntary restrictions on trade. Russian-produced aluminum and steel are used in a wide range of manufactured goods, from beverage cans to smartphones and cars.

Ukraine and Russia are substantial sources of palladium and platinum, both of which are used to manufacture catalytic converters for the automobile industry. Platinum, copper and nickel are critical inputs for electric vehicle batteries. Ukraine is also the source of 50% of the world’s neon gas, used for lasers used to make semiconductor chips – one can assume that the global shortage of semiconductor chips is unlikely to end anytime soon. Belarus, a close ally of Russia, is a major producer of potash, an important fertilizer input.

These war impacts will be differentiated by countries depending on whether they are exporters or importers of energy and food. Europe will feel it more than the United States, both via inflation and the cooling off of the post-pandemic economic recovery.

On both sides of the Atlantic, the war in Ukraine has deepened the challenge already faced by its central banks, in the quest to find balanced paths between, on the one hand, the tightening of financial conditions necessary to contain inflation and, on the other, a slowdown. growth that does not lead to a subsequent recession. Comparisons between today and the end of the 1970s have become more frequent, when the second oil price shock led to stagflation.

High commodity prices will significantly accelerate inflation in Latin America and the Caribbean, whose five largest economies – Brazil, Mexico, Chile, Colombia and Peru – already face average annual inflation rates of 8% or more. Exporters of oil, copper, iron ore, corn, wheat and metals in the region will benefit from higher prices, but the impact of food and domestic fuel prices will be intense. In Brazil, trade balances and public sector revenues should be positively impacted, but the challenge of containing inflation and its effects on the lower part of the income pyramid will increase.

In the long term, war can fundamentally alter the global economic and geopolitical order, with the reconfiguration of energy trade and supply chains. International payment networks are also likely to fragment, as countries may rethink their foreign currency reserves. Geopolitics should increase its weight as a factor in the reformulation of international payment systems and the supply and demand of commodities.
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