What’s at Stake for the Global
Economy if Russia Invades Ukraine
Countries that depend on the region’s rich supply of energy, wheat, nickel and other staples could feel the pain of price spikes.
The seaport in Odessa, Ukraine. A Russian attack on Ukraine could contribute to far-reaching
jumps in the price of food and energy.Credit...Brendan Hoffman for The New York Times
The New York Times
By
Patricia Cohen
and
Jack Ewing
Feb. 21, 2022
After getting battered by the pandemic,
supply chain chokeholds and
leaps in prices, the global economy is poised to be sent on yet another unpredictable course by an armed clash on Europe’s border.
The lead-up to a potential Russian invasion of Ukraine has already taken a toll. The promise of punishing
sanctions in return by President Biden and the potential for Russian retaliation has
pushed down stock returns and driven up gas prices.
An outright attack by Russian troops
could cause dizzying spikes in energy and food prices, fuel inflation fears and spook investors, a combination that threatens investment and growth in economies around the world.
However harsh the effects,
the immediate impact will be nowhere near as devastating as the sudden
economic shutdowns first caused by the coronavirus in 2020. Russia is a transcontinental behemoth with 146 million people and a huge nuclear arsenal, as well as a key supplier of the oil, gas and raw materials that keep the world’s factories running. But unlike China, which is a manufacturing powerhouse and intimately woven into intricate supply chains, Russia is a minor player in the global economy.
Italy, with half the people and fewer natural resources,
has an economy that is twice the size.
Poland exports more goods to the European Union than Russia.
“Russia is incredibly unimportant in the global economy except for oil and gas,” said Jason Furman, a Harvard economist who was an adviser to President Barack Obama.
“It’s basically a big gas station.”
Of course,
a closed gas station can be crippling for those who depend on it. The result is that any economic damage will be unevenly spread, intense in some countries and industries and unnoticed in others.
Europe gets nearly 40 percent of its natural gas and 25 percent of its oil from Russia, and is l
ikely to be walloped with spikes in heating and gas bills, which are already soaring. Natural gas reserves are at less than a third of capacity, with weeks of cold weather ahead, and European leaders have already accused Russia’s president, Vladimir V. Putin, of reducing supplies to gain a political edge.
And then there are food prices, which have climbed to their highest level in more than a decade largely because of the pandemic’s supply chain mess, according to a recent
United Nations report.
Russia is the world’s largest supplier of wheat, and with Ukraine, accounts for nearly a quarter of total global exports. For some countries, the dependence is much greater.
That flow of grain makes up more than 70 percent of Egypt and Turkey’s total wheat imports.
This will put further strain on
Turkey, which is already in the middle of an economic crisis and struggling with inflation that is running close to 50 percent, with skyrocketing food, fuel and electricity prices.
And as usual, the burden falls heaviest on the most vulnerable. “Poorer people spend a higher share of incomes on food and heating,” said
Ian Goldin, a professor of globalization and development at Oxford University.
Ukraine, long known as the “breadbasket of Europe,” actually
sends more than 40 percent of its wheat and corn exports to the Middle East or Africa, where there are worries that further
food shortages and price increases could stoke social unrest.
Lebanon, for example, which is experiencing one of the most devastating economic crises in more than a century,
gets more than half of its wheat from Ukraine, which is also the world’s largest exporter of seed oils like sunflower and rapeseed.
On Monday, the White House responded to Mr. Putin’s decision to recognize the independence of two Russian-backed territories in the country’s east by saying it would begin imposing limited sanctions on the so-called Donetsk and Luhansk People’s Republics.
Analysts watching the brewing conflict have mapped out a range of scenarios from mild to severe. The fallout on working-class families and Wall Street traders depends on how an invasion plays out: whether Russian troops stay near the border or attack the Ukrainian capital, Kyiv; whether the fighting lasts for days or months; what kind of Western sanctions are imposed; and whether Mr. Putin responds by withholding critical gas supplies from Europe or launching insidious cyberattacks.
“Think about it rolling out in stages,” said Julia Friedlander, director of the economic statecraft initiative at the Atlantic Council. “This is likely to play out as a slow motion drama.”
Ukraine’s port of Mykolaiv.
The Middle East and
Africa are
especially reliant on Ukraine’s exports of wheat and corn. Credit...Brendan Hoffman for The New York Times
The additional stresses may be relatively small in isolation, but they are piling on economies that are still recovering from the economic body blows inflicted by the pandemic.
What’s also clear, Mr. Daco added, is that “political uncertainty and volatility weigh on economic activity.”
That means an invasion could have a dual effect — slowing economic activity and raising prices.
In the United States, the Federal Reserve is already confronting the highest inflation in 40 years,
at 7.5 percent in January, and is expected to start raising interest rates next month. Higher energy prices set off by a conflict in Europe may be transitory but they could feed worries about a wage-price spiral.
“We could see a new burst of inflation,” said Christopher Miller, a visiting fellow at the American Enterprise Institute and an assistant professor at Tufts University.
Also fueling inflation fears are
possible shortages of essential metals like palladium, aluminum and nickel, creating another disruption to global supply chains already suffering from the pandemic,
trucker blockades in Canada and shortages of semiconductors.
The price of
palladium, for example, used in automotive exhaust systems, mobile phones and even dental fillings, has soared in recent weeks because of fears that Russia, the world’s largest exporter of the metal, could be cut off from global markets. The price of nickel, used to make steel and electric car batteries, has also been jumping.
It’s too early to gauge the precise impact of an armed conflict, said Lars Stenqvist, the chief technology officer of Volvo, the Swedish truck maker. But he added, “It is a very, very serious thing.”
“We have a number of scenarios on the table and we are following the developments of the situation day by day,” Mr. Stenqvist said Monday
.
The West has taken steps to blunt the impact on Europe if Mr. Putin decides to retaliate. The United States has ramped up delivery of
liquefied natural gas and asked other suppliers like
Qatar to do the same.
The demand for oil might add momentum to
negotiations to revive a deal to curb
Iran’s nuclear program. Iran, which is estimated to have as many as 80 million barrels of oil in storage, has been locked out of much of the world’s markets since 2018, when President Donald J. Trump withdrew from the nuclear accord and reimposed sanctions.
Some of the sanctions against Russia that the Biden administration is considering, such as cutting off access to the system of international payments known as
SWIFT or blocking companies from selling anything to Russia that contains American-made components, would hurt anyone who does business with Russia. But across the board, the United States is much less vulnerable than the European Union, which is Russia’s
largest trading partner.
Americans, as Mr. Biden has already warned, are likely to see higher gasoline prices. But because the United States is itself a large producer of natural gas, those price increases are not nearly as steep and as broad as elsewhere. And Europe has many more links to Russia and engages in more financial transactions — including paying for the Russian gas.
Oil companies like Shell and Total have joint ventures in Russia, while BP
boasts that it “is one of the biggest foreign investors in Europe,” with ties to the Russian oil company Rosneft. Airbus, the European aviation giant, gets titanium from Russia. And
European banks, particularly those in Germany, France and Italy, have lent billions of dollars to Russian borrowers.
“Severe sanctions that hurt Russia painfully and comprehensively have potential to do huge damage to European customers,” said Adam Tooze, director of the European Institute at Columbia University.
Depending on what happens, the most significant effects on the global economy may manifest themselves only over the long run.
One result would be to push Russia to have closer
economic ties to China. The two nations recently
negotiated a 30-year contract for Russia to supply gas to
China through a new pipeline.
“Russia is likely to pivot all energy and commodity exports to China,” said Carl Weinberg, chief economist at High Frequency Economics.
The crisis is also contributing to a reassessment of the global economy’s structure and concerns about self-sufficiency. The pandemic has already highlighted the downsides of far-flung
supply chains that rely on lean production.
Now Europe’s dependence on Russian gas is spurring discussions about expanding energy sources, which could further sideline Russia’s presence in the global economy.
“In the longer term, it’s going to push Europe to diversify,” said Jeffrey Schott, a senior fellow working on international trade policy at the Peterson Institute for International Economics. As for Russia, the real cost “would be corrosive over time and really making it much more difficult to do business with Russian entities and deterring investment.”
What’s at Stake for the Global Economy as Conflict Looms in Ukraine - The New York Times (nytimes.com)
