A long war in Ukraine could mean a recession for the world economy

With no sign of a quick end to the war in Ukraine, the risk is growing that the conflict will tip a fragile global economy into a slump.

In its first seven weeks, the war has already triggered massive flows of Ukrainian refugees, spurred inflation by pushing up food and oil prices, and damaged prospects for European growth.

U.S. and allied financial sanctions designed to punish Moscow have stifled the Russian economy, causing the exodus of hundreds of multinationals and pushing the government to the brink of its first default on foreign currency debt since the Bolshevik Revolution.

As US and NATO officials warn that fighting in Ukraine could continue for months or even years, a bigger economic toll looms.

On Tuesday, the World Trade Organization slashed growth forecasts for this year to 2.8% from 4.1% before the war, saying the conflict had dealt “a heavy blow” to the global economy.

Gregory Daco, chief economist at Ernst & Young, said a long war – and a further increase in Allied sanctions against Russia – could shave up to two percentage points from global growth.

Wall Street economists expect the global economy to grow 3.5% this year, according to an April survey by Bloomberg, from 4% in March.

“The longer this situation lasts, the greater the erosion becomes,” Daco said.

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Despite Moscow’s repeated threats earlier this year to act against Kyiv, the February 24 invasion surprised government leaders, business leaders and economists who expected 2022 to be a year of recovery. after the coronavirus pandemic. Instead, they find themselves embroiled in a major European conflict that looks likely to drag on.

Gen. Mark A. Miley, chairman of the Joint Chiefs of Staff, told Congress earlier this month that the fighting in Ukraine would be “measured in years.” NATO chief Jens Stoltenberg and White House national security adviser Jake Sullivan have made similar comments in recent days.

As concerns grow over the economic consequences of the war, fighting in Ukraine is expected to intensify. Russian forces are gathering for a planned assault in eastern Ukraine, where pro-Russian separatists have been fighting Ukrainian government forces for several years.

On Sunday, the World Bank warned that “the war has added to growing concerns about a sharp global slowdown.”

Prices climbed 8.5% in March from a year ago

The battlefield straddles some of the most important cultivated lands on the globe. Ukraine and Russia together account for a quarter of global wheat exports, according to the World Bank.

Prolonged fighting in Ukraine could interrupt the annual cycle of sowing and harvesting on Ukrainian farms, disrupting global food trade beyond the end of 2022. Already, at least 20% of wheat planted in Ukraine “may not be harvested due to direct destruction, limited access or a lack of resources to harvest the crops,” the UN Food and Agriculture Organization said last week.

The UN agency cut its forecast for world grain trade to 469 million tonnes, down 14.6 million tonnes from its March estimate, citing the suspension of exports from Ukraine and Russia. Falling trade volumes will reduce food imports across much of the Middle East and North Africa, raising concerns about hunger and political instability.

The impact of the war comes as the two main engines of the world economy – the United States and China – are facing their own problems. China’s zero-tolerance coronavirus policy is upending supply chains and raising doubts about the government’s 5.5% growth target.

In the United States, the Federal Reserve is struggling to quell the highest inflation in 40 years. By driving up oil prices and consumer expectations for higher prices, the war makes it more likely that the Fed will hike rates aggressively, raising recession risks, said Mark Zandi, chief economist at Moody’s Analytics.

“The fallout from the Russian invasion on the US economy has become significantly more problematic,” Zandi wrote in a note to clients on Monday.

The war and ensuing sanctions also caused unexpected damage to global trade flows. Russia and Ukraine together account for less than 3% of world exports. But hostilities have complicated supply chains by increasing shipping and insurance costs in the Black Sea region, according to a new World Bank study on the effects of war.

After more than two years of chronic supply chain havoc, the war has become yet another headache for the automotive, petrochemical, agriculture and construction industries, the bank said. .

Another casualty of war may be the body that coordinates the global response to major recessions, the Group of 20 nations. Treasury Secretary Janet L. Yellen said last week that Russia should be kicked out of the G-20 over its invasion of Ukraine, adding that the United States would boycott meetings of the organization if Russian officials were attending.

Indonesia, which is hosting this year’s summit, said Russia remains welcome.

The first test of the US position could come on April 20, when G-20 finance ministers and central bank officials are due to meet in Washington. In addition to the United States, the group includes the European Union, Canada, Japan, China and developing countries such as Brazil and South Africa.

“Since the 2008 financial crisis, the G-20 has been the most important stabilizing force in the global economy,” said Josh Lipsky, director of the Atlantic Council’s GeoEconomics Center. “It is a very important coordinating body.

Russia largely resisted the initial effects of the sanctions, with the ruble rebounding from its initial 40% plunge to almost regain its pre-war value, helped by the imposition of controls on the movement of funds in and out. outside of Russia. Russia’s central bank cut its main interest rate to 17% last week after doubling it to 20% to defend the rouble.

The decline suggests Russian officials believe they can afford to lower their defenses around the ruble and make credit more affordable so businesses can invest and hire.

“They managed to put out the first fires – the bank runs and the potential collapse of the financial system. Now they are turning to supporting growth,” said Elina Ribakova, deputy chief economist at the Institute of International Finance. “But the central bank can’t do much.”

Indeed, the country is heading towards a deep recession and cracks are appearing in its financial foundations. On Friday evening, S&P Global Ratings said the Russian government was in “selective default” on its US dollar-denominated bonds after making interest and principal payments on April 4 in rubles.

The Treasury Department – as part of tougher US sanctions – has blocked US banks from receiving payment in dollars from Russia. The department initially said US investors could accept dollar payments on Russian debt until May 25.

Russian Finance Minister Anton Siluanov told Russian newspaper Izvestia that his government would not issue new bonds this year, fearing the required interest rate was “cosmic”, and was planning legal action in case of default of payment.

S&P said it does not expect the Russian government to meet its payment obligations within the 30-day grace period because “sanctions against Russia will likely be further tightened.”

Russia’s invasion of Ukraine could change the global economic game

As the war continues, reports of atrocities committed by Russian soldiers call for a tougher Allied response.

Payments from Europe for Russian energy products represent a lifeline for Russian President Vladimir Putin, replenishing reserves of hard currency that sanctions have squeezed.

Reflecting soaring oil and gas prices, Russia’s central bank said on Monday that the country’s account surplus – the broadest measure of trade – reached $58.2 billion in the first quarter. It was the highest figure since 1994, and more than double the $22.5 billion reported in the same period last year.

EU officials are meeting today to discuss potential moves to cut financial flows to Moscow, even as Germany and other countries that rely heavily on Russia for energy remain reluctant. About half of Russia’s 6 million barrels a day of oil exports last year went to Europe.

“We have already imposed massive sanctions, but there is still a lot to do in the energy sector, including oil,” tweeted Josep Borrell, the EU’s top diplomat, over the weekend.

Any first move would likely involve a gradual reduction in purchases from Russia, according to Daniel Tannebaum, a partner at Oliver Wyman in New York, who advises financial institutions on sanctions.

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