The Russian Ukrainian war, which began on February 24, 2022, by a decision of Russian President Vladimir Putin, dashed hopes for the recovery of the global economy in the short term at least, as the world has not yet fully recovered from the shock of the pandemic that has exhausted it since the beginning of the year 2020.
It is expected Analysts and experts expect inflation to rise more around the world, which threatens growth and shakes the already unstable financial markets.
The size of the next “economic earthquake” will depend on the extent and scope of this war.
How Does the Russian-Ukrainian War Shake the Global Economy?
The Russian invasion poses enormous risks to the global economy, with the conflict already looking like the most dangerous war in Europe since 1945, according to a report by Bloomberg.
The attack came after weeks of tensions that have already sent shockwaves through the global economy by raising energy prices. This accelerated on the day the Russian military operations began in Ukraine on February 24, and oil jumped above $100 a barrel for the first time since 2014, while European natural gas jumped by more than 60%.
As Ukraine grapples with the Russian invasion, Western governments are taking steps to punish Russia, even though they know doing so will have repercussions on their economies.
America, Europe and Britain have imposed harsh sanctions targeting the backbone of the Russian economy, while high gasoline prices are already eroding the popularity of US President Joe Biden among voters, according to Bloomberg.
The current conflict is the most serious in Europe since 1945, and its economic repercussions will be significantREUTERS
The pandemic left the global economy with 3 vulnerabilities: high inflation, unstable financial markets, and a threat to growth as well, as aftershocks from the Russia-Ukrainian war could easily exacerbate these problems.
In terms of growth, households that spend more of their income on fuel and heating will have less money for other goods and services.
Falling markets will add another drag, hitting wealth and confidence, and making it harder for companies to tap the money to invest.
How bad Could the Economic Effects of the Russian-Ukrainian War Be?
The extent of the current conflict’s blow to the global economy will depend on the length and scope of the war, the severity of Western sanctions, and the potential for Russian retaliation, a Financial Times report says.
There is also the potential for other ups and downs, from the exodus of Ukrainian refugees to a wave of cyber-mutual attacks.
While a report by the Spanish newspaper Elpais says that the European Union is one of the markets most exposed to risks due to the economic sanctions war with Moscow.
Energy price increases and price hikes will mainly affect countries most dependent on gas imports within the European Union, and buyers of grain grown in the region. Outside of Russia itself, the EU is the market most vulnerable to “war of retaliation”.
Before the war began, inflation soared to 7.5% in the United States in January, the fastest pace in four decades, and 5% in the eurozone, the highest since 1997.
Pressure is expected to intensify to raise interest rates, but there is Also doubts about whether this should be done without slowing down the recovery.
Several Scenarios Await the Global Economy
Although wars are unpredictable, and their results are more chaotic than any expectations, developing some scenarios can help in understanding the conditions that countries’ economies will accept.
1- A Quick End to the War and the Continued Flow of Oil and Gas
Bloomberg Economics says a quick end to the fighting in Ukraine will prevent a further upward spiral in commodity markets, keeping US and European economic recovery on track, but central bankers will have to adjust their plans, not cancel them.
This optimistic scenario does not see any disruption in oil and gas supplies, with prices stabilizing at their current levels, and tightening financial conditions, but without a sustainable slide in global markets.
This kind of optimism appeared in the oil markets after the United States and its allies revealed the size of the sanctions on Russia, although they included cutting some Russian banks from the global “Swift” system, but until now, Russian energy supplies have not been the target of Western sanctions.
2- Longer Conflict, Tougher Western Reaction and Damage to Energy Supplies
In the second scenario, a protracted conflict, a tougher Western response, and disruptions to Russia’s oil and gas exports, will lead to an even larger energy shock and a major blow to global markets. This is likely to lead to an interest rate hike by the European Central, while Fed tightening will slow.
Some tanker owners are avoiding dealing with Russian crude until they have more clarity about the sanctions. Some major gas pipelines pass through Ukraine and can be damaged during the fighting, and limited supply disruptions could exacerbate the shock to energy prices.
Natural gas prices continue to rise, as they rose on Wednesday, March 2, above the level of $2000 per thousand cubic meters, for the first time since last December 21.
The Russian “TASS” news agency reported that the increase in natural gas prices in Europe came after the United States, the United Kingdom, the European Union and other countries imposed sanctions on entities and personalities in Russia.
Meanwhile, the Russian “Gazprom” company confirmed the continuation of pumping blue fuel to Europe through Ukraine, in a message to reassure markets that fear that gas supplies will be affected by the situation surrounding Ukraine.
In this scenario, Europe will likely be able to keep its lights on, but there will be material damage to GDP, prompting a rate hike from the European Central Bank until 2023.
In the US, this scenario could push headline inflation to 9% in March and keep it close to 6% by the end of the year. At the same time, more financial turmoil and a weakening economy, in part due to the European downturn, will leave the Federal Reserve in a tailspin.
3- Worst Case Scenario..Complete Power Outage
But the worst is the third scenario, where cutting off gas supplies in Europe could lead to more recession, while the US would see tighter fiscal conditions and a bigger hit to growth, and the Federal Reserve has a notably more pessimistic view of it.
Russia may respond to the escalation of Western sanctions against it by stopping the flow of gas to Europe. And according to Bloomberg, EU officials did not think about it last year when they simulated 19 scenarios to test the stress on EU energy security.
However, the European Central Bank estimates that a gas rationing shock of 10% could reduce GDP in the Eurozone by 0.7%.
For the United States, the growth shock will also be significant. And there could be unintended consequences from extreme sanctions that disrupt the global financial system, with repercussions for US banks.
The Fed’s focus will shift to maintaining growth, but if higher prices entrench inflation expectations among consumers and businesses, that would raise expectations. Worst case scenario for monetary policy: The need to tighten aggressively even in a weak economy.
Other Winners and Losers
The above scenarios, of course, focus on the world’s largest advanced economies, but countries almost everywhere will feel the impact of higher commodity prices, which include staples like wheat as well as energy.
The continuation of the Russian-Ukrainian war threatens supply chains around the world, forcing the commodity and food markets to rise in an unprecedented way, and they have already reached high levels, with the warring countries accounting for a third of the world’s wheat exports and a fifth of the corn trade.
Countries and multinational companies with operations and investments in Russia are preparing for the fallout from the disruption of Russian exports, which threatens to affect a wide range of industries, from fertilizer manufacturers to food, automobiles, aircraft and more, according to the Financial Times.
Some, such as Saudi Arabia and other Gulf oil exporters, may benefit from its rise, but for most emerging markets – already suffering from a slow recovery – the combination of higher prices and capital outflows could deal a major blow to their economies, leading to Exacerbation of the risk of debt crises after the epidemic. Turkey, a major energy importer, which already had a declining currency and soaring inflation before the Ukraine crisis, is a stark example of this.
Then there are hard-to-quantify risks such as Russia’s cyberattacks. The US Federal Reserve Bank of New York estimated that a single cyber-attack weakens payment systems and could extend to 38% of all banking assets, leading in a worst-case scenario to hoarding and bankruptcy.
But one thing is clear: Of the major economies, it will be Russia that will take the biggest hit, and the price of President Putin’s foreign policy is very likely to be a shrinking economy at home, says Bloomberg.