On February 24, 2022, the Russian Armed Forces began an invasion operation on the territory of Ukraine in an apparent attempt to annex that country. From a military point of view, there seems to be no doubt about the outcome of the conflict: Ukraine will be subjugated by the vastly superior Russian military forces. The question that deserves to be analyzed in more detail is of an economic nature, namely: what are the impacts of the war on the international economy and on Brazil in particular.
In December 2021, Russia publicly announced that it would carry out military maneuvers near the border with Ukraine. Since then we have seen a considerable increase in commodity prices in international markets. Between January 3rd and February 23rd, 2022, prices on futures markets for wheat, oil and soybeans increased by 14.81%, 21.25% and 24.62% respectively. After the beginning of hostilities and the application of economic sanctions to Russia (until March 3), the price increases of these commodities were, respectively, 7.23%, 16.08% and 11.28%.
Here we have the first economic consequence of the conflict in Ukraine, namely: a sharp rise in food and energy prices, which affects not only the Russian economy, but all the economies of the world. This supply shock will produce an acceleration of inflation worldwide, which will demand an anticipation of the increase in the basic interest rate in the United States – which was already “priced” to occur sometime in the second half of 2022 – producing a chain reaction in the Central Banks of other developed countries, even in the case of the European Central Bank led by Christine Lagarde, which had shown itself to be refractory to an increase in interest rates (currently at the level of -0.5% pa) due to still incomplete recovery of employment and income in the Euro Area in view of the effects of the Covid-19 pandemic.
The second economic consequence will therefore be a stronger-than-expected tightening of monetary policy at the end of 2021 in developed economies, which will translate into a slowdown in the growth of these economies throughout 2022. The economic sanctions applied to Russia – whose effectiveness in removing Putin from power is dubious given the previous examples of Cuba, North Korea, Venezuela and Syria – should worsen this situation. The (partial) withdrawal of Russian banks from the Swift system will not only not make Russian oil exports unfeasible, given that they will be made by banks in other countries; how, by increasing their financial cost, consumers in developed countries will end up paying more for imported oil.
Brazil, contrary to what was stated by the minister of economy, will not be immune from these effects due to (sic) its geographical distance from the theater of war. The increase in food and energy prices will keep inflation under pressure in Brazil throughout 2022, and it is unlikely that the IPCA accumulated in 12 months will close the year below 7%, staying above the ceiling of the inflation targeting regime. for the second year in a row. In this context, the BC should prolong the cycle of raising the Selic rate, ending it in the second half of the year, with a level close to 14% pa. The extension of the monetary tightening cycle should further reduce the traction of the Brazilian economy, causing growth in 2022 is below the forecast of 0.6% made by Boletim Macro IBRE/FGV on February 21. My prediction is that in the current scenario, GDP in Brazil should contract throughout 2022.
* Professor at the Department of Economics at the University of Brasília and at the Doctoral Program in Economic Integration at the University of the Basque Country (Bilbao/Spain)
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