The global economic picture has deteriorated in recent days as troops clashed in Ukraine, and surprisingly powerful financial penalties shook Russia’s economy, threatening to further global fuel inflation. On Monday, the price of oil, natural gas, and other necessities skyrocketed. At the same time, like the US, Europe, and their allies tightened the clamps on Russia’s financial operations and froze hundreds of billions of dollars in the central bank’s assets held abroad, the strain on supply lines, which were still reeling from the pandemic, grew. Russia has long been a modest factor in the global economy despite its massive energy exports, accounting for only 1.7 percent of global production. In recent years, President Vladimir V. Putin has taken steps to insulate it further, building up a stockpile of foreign exchange reserves, decreasing national debt, and even prohibiting cheese and other European food imports. However, while Mr. Putin has floated a slew of international standards, he cannot ignore a modern and massive financial system dominated by governments and bankers from outside his country. So he has assembled tens of thousands of troops, and allied nations have responded by mobilizing their immense financial resources.
“It’s now a bet between a financial clock and a military clock to vaporize the resources to execute a war,” said Julia Friedlander, head of the Atlantic Council’s economic statecraft program. The invasion and sanctions, taken together, infuse a significant amount of uncertainty and volatility into financial decision-making, raising the danger to the global picture. The restrictions were aimed to prevent interrupting vital energy exports, which are used to heat homes, power factories, and fill gas tanks across Europe. This helped to moderate, but not eliminate, a rise in energy costs brought on by the conflict and fears of disruptions in oil and gas supply. However, fears of shortages also drove up various commodities and metals, putting more pressure on households and companies. Russia and Ukraine also export a lot of wheat and grain and essential metals like palladium, aluminum, and nickel, which are used in everything from cell phones to vehicles.
Transport expenses, which are already skyrocketing, are anticipated to rise much further. “Rates for ocean and air are likely to increase,” said Glenn Koepke, general manager of network cooperation at FourKites, a Chicago-based supply chain consultant. He predicted that maritime charges may double or triple, from $10,000 to $30,000 per container, and that air freight costs would rise much more. In addition, Russia has restricted its airspace to 36 nations, forcing freight planes to take circuitous paths, resulting in higher fuel costs and perhaps driving them to lower the number of their supplies.
“There will be greater goods shortages,” Mr. Koepke said. “Companies are building up for summer demand, and that’s going to have a huge influence on our supply chain,” he added, even though it’s a slower season now. Moreover, several Wall Street experts and economists admitted on Monday that they had misjudged the scope of Russia’s invasion of Ukraine and the international response in a rush of revisions. As the events unfolded, estimates of the likely economic consequences ranged from minor to catastrophic.
Inflation was already a problem since it was at its highest level since the 1980s in the United States. Every possibility now included worries about how much higher inflation may go — and how the Federal Reserve and other central banks would react. “The Fed is in a box,” Desmond Lachman, a senior scholar at the American Enterprise Institute, said. “Inflation is at 7.5 percent, yet they know that raising interest rates will wreck markets.” “The policy options aren’t great. Therefore I don’t see how this will turn out well.”
Others were more concerned about the spillover consequences of Russia’s economic isolation. According to Adam Posen, head of the Peterson Institute for International Economics, there are many unanswered uncertainties about what the conflict will mean for inflation — and if it leads to stagflation, which occurs when economic growth slows, and prices rise rapidly. “The harm is likely to be minor,” he stated in general. However, that doesn’t rule out the possibility of severe discomfort in some areas. Mr. Posen noted that a few European banks might be harmed due to their exposure to the Russian financial system. Eastern European enterprises could lose access to money in Russia. In addition, thousands of refugees leaving Ukraine are pouring into neighboring nations such as Poland, Moldova, and Romania, potentially increasing their expenditures. Turkey’s already-struggling economy is expected to suffer a setback. Because of rising energy prices, financial system disruptions, and tourism decreases, Oxford Economics fell its annual growth prediction for Turkey by 0.4 percentage points to 2.1 percent.
Russia accounted for 19% of visits in 2021, while Ukraine accounted for 8.3%. According to Oxford, inflation, which had already reached a two-decade high of about 50%, is now expected to hit 60%. In the United States, Cecilia Rouse, the chair of the Biden administration’s Council of Economic Advisers, indicated that the war’s most enormous impact on the economy increased petrol costs. However, she remarked, “This has clouded the view at a Washington conference.”
