The outbreak of war in Ukraine puts Europe on the verge of the largest armed conflict since World War II and constitutes a threat to the recovery of the international economy after two years of the pandemic. The attack launched by Russia this Thursday will result, according to experts, in greater turbulence in energy prices and will fuel the current wave of inflation. The rises will mainly affect the countries most dependent on gas imports —such as the Europeans— and the cereals that arrive from the region. Apart from Russia, the EU is one of the markets most exposed to a retaliatory war.
The outlook in the markets this Thursday is a foretaste of what may be to come: oil and gas skyrocketing, cereals rising, stock markets sharply down, economic recovery in doubt. All this in a context already complicated by uncertainty about the impact of a new round of sanctions from the West. The magnitude of the blow to the world economy will depend on the duration and intensity of the conflict. “The main channel of transmission to the European economy is going to be energy prices,” predicts Lorenzo Codogno, professor at the London School of Economics and former secretary of the Italian Treasury.
In the short term, the economy is facing worsening inflation, which has been hampering the recovery for months. “We are going to see how inflation persists and there will probably be a tightening of monetary policy,” says Juan Carlos Martínez Lázaro, an economist and professor at IE University. “It’s a complicated scenario for central banks,” he adds. Isabel Schnabel, member of the Executive Committee of the ECB, recalled this Thursday that the attacks come just when Europe was beginning to recover and the ECB was thinking of tightening its fiscal policy to tackle inflation. “The impact of the war that is looming over Europe has clouded the world scene,” said the German.
Inflation climbed in the United States to 7.5% in January, the fastest pace in four decades, and 5% in the euro zone, the highest figure since 1997. The pressure to raise interest rates is going to intensify, but there are also doubts about whether to raise them or not, and to what extent, without slowing down the recovery.
“A large-scale invasion is likely to have effects on the global economy, due to the combination of sanctions, the disruptions of war, and the impact of possible Russian retaliation on energy markets,” the Eurasia experts explain in a note. Group. The think tank calculates that growth in the developed world could be reduced by a point, while supply chain problems worsen and governments take more protectionist measures.
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One of the great economic keys is gas. Russia and Ukraine together represent a modest part of the world economy. But Moscow has great energy power, and the EU is highly dependent on it. Europe buys from Russia half of the gas it consumes and almost a quarter of its oil. Prices have been rising for months and official GDP growth forecasts are increasingly questioned. JP Morgan, for example, has just lowered its forecast for the first quarter of the euro zone, from 1.5% to 1%.
Experts consider it unlikely that Western sanctions will harshly penalize Russian gas, at least until alternative sources of supply are sought, something very complicated given the volume that Moscow sends to Europe. There is also no indication that the Kremlin will turn off the tap and forgo those fat revenues. Although Moscow increases gas sales to Beijing as it has been doing in recent months, the gas pipelines that go to China do not currently have the necessary capacity to compensate for what would be lost in Europe.
Professor of Economics José Manuel Corrales, from the European University, highlights the importance of Germany’s suspension of the start-up of the Nord-Stream 2 gas pipeline, whose announcement caused increases in energy prices and has been a of the most concrete and harsh reprisals undertaken in this crisis against Moscow. “It all depends on the scale of the intervention, but there will be enormous economic repercussions, because the inflationary dynamics can affect the recovery process, it will be a very important burden, and it will be immediately noticeable in the shopping cart,” he explains.
The dependence on Russian gas places Europe as one of the markets most exposed to an escalation of the conflict and an eventual exchange of sanctions between the two blocs, according to experts. The details of the new EU and US punitive measures are yet to be known to know if they will affect Western companies and investors that work with Russia.
Aware of the importance of trade relations and dependence on gas, the EU has said that the imposition of sanctions will be gradual and in stages. The EU buys almost 40% of Russia’s goods exports, but almost 70% of this total is gas, oil and coal. “Germany and Italy are the most exposed countries, due to gas and oil”, explains Lorenzo Codogno. Apart from energy, the volume of exports from the manufacturing sector to the EU is insignificant: around 25,000 million. The sale of goods is another 10,000 million. Although there are possible effects. For example, Russia’s MC Norilsk Nickel is the world’s largest producer of palladium, an important metal for the auto industry, which is already suffering from a shortage of semiconductors. Western sanctions are unlikely to target this sector.
On the contrary, EU exports to Russia do carry some added value, and are important for industry in the east of the continent. 88% of the total are manufactured goods, some 78,000 million euros per year, half vehicles and machinery. There are unlikely to be targeted sanctions there, but Moscow could turn its back on these imports and look to China.
Cereals are also important. Russia and Ukraine are responsible for 30% of world wheat exports. The Black Sea is one of the great distribution channels for this cereal. Ukraine is also a large producer of corn and barley. This Thursday, cereal prices reached their highest level since July 2012. Economists believe that advanced countries can deal quite well with this situation, even if inflation increases. But the impact can be devastating for more fragile economies. “An increase in prices or shortages can trigger a crisis in North Africa or the Middle East,” warns Corrales.
The caution in imposing sanctions so far, so that they do not harm the West, makes it unlikely that what Juan Carlos Martínez calls “the nuclear button” will be activated for the time being. That is, that Russia be prohibited from accessing the global payment system SWIFT, which is used by more than 11,000 financial institutions in more than 200 countries. This measure would hit Russian banks hard, but the consequences are complex. Banning SWIFT would make it harder for European creditors to get back their borrowed money, although Russia has been creating an alternative payment system. European banks — particularly those in Austria, Italy and France — are the world’s most exposed to Russia.
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