The conflict has dealt a severe blow to the global economy, hurting growth and raising prices.
If we look beyond the suffering and humanitarian crisis caused by Russia’s invasion of Ukraine, the effects of slower growth and faster inflation will be felt by the global economy as a whole.
These effects will flow through three main channels. First, higher prices for basic commodities such as food and energy will lead to higher inflation, eroding the value of income and weakening demand. Second, periphery economies in particular will experience disruptions to trade, supply chains, and remittances, and will experience a historic surge in refugee flows. Third, lower business confidence and increased investor uncertainty will lead to weaker asset prices, tighten financial conditions, and likely stimulate capital outflows from emerging markets.
With Russia and Ukraine being major commodity producers, supply chain disruptions have led to sharp increases in global prices, particularly for oil and gas. Given the historical level of wheat prices, food costs have risen sharply with Ukraine and Russia contributing 30% of world wheat exports.
Looking beyond global influence, the countries that will feel the most pressure are those with direct trade and tourism relationships and financial exposure. As for economies dependent on oil imports, they will have higher public finances, trade deficits and higher inflationary pressures, although higher prices may benefit some oil-exporting countries such as the Middle East and Africa.
From sub-Saharan Africa and Latin America to the Caucasus and Central Asia, sharp increases in food and fuel prices will increase risks of instability, while food insecurity is likely to increase in parts of Africa and the Middle East.
While it is difficult to gauge the frequency of these echoes, we see potential for downward revisions to growth expectations when we present a clearer picture in the WEO and regional assessments.
In the long run, if energy trade changes, supply chains are reconfigured, payment networks are fragmented, and countries reconsider their currency reserves, the war could fundamentally change the global economy and geopolitical order. Rising geopolitical tensions could increase the risks of economic fragmentation, particularly with regard to trade and technology.
The losses that Ukraine is suffering are already great. Unprecedented sanctions against Russia will paralyze financial intermediation and commercial activity, which will inevitably lead to a deep recession there. The depreciation of the ruble stimulates inflation, which further reduces people’s living standards.
Energy is the main channel for transmitting European influence, and Russia is the main source of Europe’s natural gas imports. It could also lead to wider disruptions in supply chains. These effects will lead to higher inflation and slow recovery from the pandemic. Eastern Europe will see higher financing costs and a boom in refugee flows, having absorbed most of the three million refugees who have recently fled Ukraine. Data from the United Nations also appears.
European governments are also likely to face fiscal pressures from increased spending on energy security and defense budgets.
While the external risks of falling Russian assets are limited by global standards, pressure on emerging markets may increase if investors seek safer havens. Likewise, most European banks have limited and manageable direct exposure to Russia.
Caucasus and Central Asia
Looking beyond Europe, these neighbors will feel the consequences of Russian stagnation and sanctions. Close relations with it at the commercial level and through payment systems will impede trade and reduce remittances of workers abroad, investment and tourism, which will harm economic growth and negatively affect inflation and external and public financial accounts.
While higher international prices are expected to benefit commodity exporters, they are at risk of lower energy exports if sanctions are extended and applied to pipelines through Russia.
Middle East and North Africa
The region could face the most severe impacts of rising food and energy prices and tightening global financial conditions. If we take Egypt as an example, 80% of its wheat imports come from Russia and Ukraine, which are popular tourist destinations in both countries, and tourism consumption will also shrink.
Policies to reduce inflation, such as increasing government support, will put pressure on already weak fiscal accounts. In addition, deteriorating external financial conditions can stimulate capital outflows and exacerbate negative growth effects in countries with high debt levels and high financing needs.
Higher prices can exacerbate social tensions in countries with weak social safety nets, fewer jobs, limited fiscal space and unpopular governments.
As the continent gradually recovers from the pandemic, the crisis threatens its progress. Many countries in the region are at great risk from the effects of war, precisely because of rising energy and food prices, declining tourism, and potential difficulties in accessing international capital markets.
The conflict comes at a time when most countries in the region are suffering from shrinking fiscal space to deal with the impact of the shock. This could lead to increased social and economic stress, exposure to public debt, and the scars of the pandemic already afflicted by millions of families and businesses.
Wheat prices soared to record levels, raising concerns about imports of about 85 percent of the region’s wheat supply, a third of which comes from Russia or Ukraine.
Food and energy prices are the main channels through which the repercussions can spread, and in some cases may be severe. Higher commodity prices are likely to accelerate inflation in Latin America and the Caribbean, where the five largest economies in the region (Brazil, Mexico, Chile, Colombia and Peru) are growing at an average annual rate of 8%. Their central banks may have to continue to defend their anti-inflation credibility.
The impact of higher commodity prices on economic growth has been mixed. High oil prices are already hurting importers in Central American and Caribbean countries, while countries exporting oil, copper, iron ore, corn, wheat and minerals can charge higher prices for their products, mitigating their impact on growth.
Financial conditions remain relatively favourable, but the intensification of the conflict could lead to a global financial crisis, which, along with the tightening of domestic monetary policy, could hamper growth.
The limited relationship between the United States, Ukraine and Russia mitigated the immediate impact, but inflation had already reached its highest level in four years before the war, meaning that prices will likely continue to rise when the Federal Reserve starts raising interest rates.
The transfer of Russia’s influence into the region may be limited by the lack of strong economic relations between the two countries, but slower growth in Europe will have serious repercussions for major exporters.
The biggest impact on the current account will be in the oil-importing economies of the Association of Southeast Asian Nations (ASEAN), India and promising economies including some Pacific islands. These effects are likely to be intensified by the decline in tourism in countries that rely on Russian visits.
For China, the immediate impact is expected to be minimal given that fiscal stimulus will support the 5.5% growth target for this year and Russia buys relatively few Chinese exports. However, rising commodity prices and weak demand in key export markets exacerbated its challenges.
Japan and South Korea had similar effects, which could be mitigated by the new oil subsidies. Inflation will rise in India as energy prices rise, as it has already reached the upper end of the central bank’s target range.
Food price pressures in Asia are expected to ease due to domestic production and a greater reliance on rice than on wheat. Imports of expensive food and energy will raise consumer prices, but subsidies and higher prices for fuel, food and fertilizer are likely to mitigate their direct impact – although public finances will bear the cost.
The consequences of the Russian war against Ukraine are not limited to the actual destabilization of the situation between the two countries, but also include the region and the world. It also illustrates the importance and existence of a global safety net, and the establishment of regional arrangements in order to protect the economy from shocks.
As the Managing Director of the International Monetary Fund told reporters at a press conference in Washington, “We live in a world that is more vulnerable to shocks.” “We need collective strength to deal with the shocks to come,” she added. The full picture of some of the effects may not be clear for many years, but there are already clear indications that the war and the resulting rise in the cost of basic commodities will make it more difficult for policymakers in some countries. To strike a delicate balance between the two. Curb inflation and support the economy’s recovery from the epidemic.