Russia-Ukraine Crisis
(How it affects the whole world's economy)
Tejashree Anant Salvi
Introduction
A battle that accelerates inflation, scares markets, and foreshadows catastrophe for everyone from European consumers to indebted Chinese developers and African households facing soaring food costs is just what a weak global economy needed. Russia's war on Ukraine and the West's retaliatory sanctions may not herald a new global crisis. The combined GDP of the two nations is less than 2% of the global GDP. Many regional economies are still in good shape, having recovered quickly from the pandemic crisis. However, the controversy threatens to cause catastrophic economic damage to some nations and industries, possibly causing suffering to millions of people. Russia is the third largest factory producer in the world and a major exporter of natural gas. Ukraine farms offer food for millions of people around the world. And the financial markets are in danger because central banks are preparing to reverse the years of Easy money’s policies and interest rates for the excursion to combat inflation. We expect higher interest rates limit consumption and increase the danger of another recession.
❖ Increased fuel prices
Russia is the world's third-largest oil producer and a major natural gas exporter. The fields of Ukraine feed on millions of people around the world. Russia supplies over 40% of Europe's natural gas. Gas prices are currently four times higher than they were at the start of 2021A mild winter and US liquefied natural gas have alleviated some of Europe's anxieties over a probable loss of Russian gas supply. High gas prices, on the other hand, have resulted in greater residential heating fuel expenses and cuts by major industrial users. In January, the annual rate of inflation in the 19 Euro zone countries jumped to 5.1 percent. This is the highest rate in the group since the recordings started in 1997.
❖ Wheat exports have been reduced.
Ukraine is the fifth exporter of the world's grain wheat. The danger to eastern Ukrainian fields and Black Sea port exports might limit wheat supply at a time when food prices are at their highest level since 2011. Food scarcity is a problem in several nations. Agriculture expert Alex Smith wrote about the threat in the publication Foreign Policy last month. Many countries that depend on Ukraine’s wheat, he wrote, “already face food insecurity from ongoing political instability or outright violence. Yemen, for example, imports 22% of its wheat from Ukraine, Libya about 43% and Lebanon about half.
❖ Inflation
Rising energy and food costs will put more pressure on policymakers and central banks already trying to keep inflation under control. According to the London-based research company Capital Economics, the Ukraine situation might push higher natural gas costs and raise oil prices as high as $140 per barrel. This combination would raise annual inflation in the world's wealthiest countries by 2 percent. In the United States, prices of products climbed at a 7.5 percent annual pace in the year ended in January, excluding energy and food. It was the largest annual gain in 40 years. On Tuesday, American Vice President Joe Biden unveiled a slew of additional penalties against Russian institutions and leaders for what he called "the beginning of a Russian invasion of Ukraine". Biden also warned Americans, "As I said last week, defending freedom will have costs, for us as well and here at home.”
❖ Stock prices fall
Stock indices in Europe, Asia and the United States fell. In response to worldwide political concerns, Michael Taylor, managing director of Moody's Investors Service, cautioned that investors may shift to safer assets. If this occurs, the cost of financing for riskier enterprises may rise. Some believe that if the United States removes Russia from the global financial payment network SWIFT, financial markets would become riskier. The network connects thousands of banks, allowing them to trade money all across the world. Such a move would result in the cessation of oil payments to Russia, which account for 40% of the country's revenue. However, it may harm US and European enterprises that do business with Russian firms.
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❖ India and the Indian Economy
However, a rise in crude oil prices, the potential of a European recession in the case of a full-fledged Ukraine war, and tougher sanctions against Russia do not bode well for the Indian economy, according to ICICI Securities in a new research study. India is a significant crude oil importer. As a result, the first effect of rising crude oil prices is on the current account. Rising crude prices are occurring at a time when the current account deficit has already expanded. However, India now has significantly more insurance against any instability in its balance of payments than it did previously. According to Nomura, every 10% increase in crude oil prices reduces GDP growth by 0.2 percentage point (pp) and widens the current account by 0.3% in India. This, it argues, might exacerbate growth risks as the country navigates an uneven recovery and counteracts near-term tailwinds such as increasing public capital expenditure, service normalization, and cheap financial conditions. Inflation forecasts climb in lockstep with rising crude oil prices, with a 10% increase in crude oil generally translating into a 0.3-0.4 percentage point increase in headline inflation. According to Dr. Soumya Kanti Ghosh, group chief economic adviser at State Bank of India, there appears to be a 90-100 basis point (bps) upside risk to the RBI's 4.5 percent inflation target for FY23 if oil prices average $90/barrel, and a 100-130 basis point (bps) upside if oil prices average $100/barrel.
Conclusion
Russia's choice to invade Ukraine and pose a military challenge to the United States and its NATO allies has the potential to alter the fundamental assumption of a mutually beneficial but stable global economic system. Russia is a far lesser participant in terms of global GDP (its GDP levels are actually lower than India's) and would very certainly suffer significant economic losses as a result of its present choice. Experts believe Russia has been de-accumulating its dollar reserves in order to prepare for the economic consequences of its actions. However, the collateral damage to the global economy, whether in the form of an escalation of armed confrontation or the worldwide uncertainty that inactivity by the US and its allies would cause for comparable measures by nations such as China, does not speak well for future economic certainty. This has the ability to send the world economy into unknown territory.
References
❖ https://learningenglish.voanews.com/a/russia-ukraine-conflict-affects-worldwide-economy/6457461.html
❖ https://economictimes.indiatimes.com/news/international/business/russia-ukraine-conflict-raises-big-risks-for-global-economy/articleshow/89799879.cms
❖ https://www.bloombergquint.com/business/russia-ukraine-crisis-how-it-affects-the-world-and-india
❖ https://www.business-standard.com/article/economy-policy/russia-ukraine-crisis-indian-economy-among-worst-hit-indonesia-to-benefit-122022500400_1.html