US and allied economic sanctions designed to punish Moscow have put a stranglehold on the Russian economy, triggered an exodus from hundreds of multinational corporations and pushed the government to the brink of its first default in foreign currency debt since the Bolshevik revolution.
With US and NATO officials warning that fighting in Ukraine could continue for months or even years, a major economic toll threatens.
On Tuesday, the World Trade Organization lowered this year’s growth forecast to 2.8 percent from 4.1 percent before the war, saying the conflict had inflicted “a severe blow” on the world economy.
Gregory Daco, chief economist at Ernst & Young, said a protracted war – and a further increase in Allied sanctions against Russia – could remove up to two percentage points from global growth.
Wall Street economists expect the global economy to grow by 3.5 percent this year, according to a April Bloomberg survey, down from 4 percent in March.
“The longer this situation lasts, the more significant the erosion becomes,” Daco said.
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Despite Moscow’s repeated threats earlier this year to act against Kiev, the February 24 invasion surprised government leaders, business leaders and economists, who had expected 2022 to be a year of recovery from the coronavirus pandemic. Instead, they find themselves struggling with a major European conflict that seems to be protracted.
General Mark A. Milley, chairman of the Joint Chiefs of Staff, told Congress earlier this month that the fight in Ukraine would be “measured this year”. NATO chief Jens Stoltenberg and White House National Security Adviser Jake Sullivan have offered similar comments in recent days.
As concerns about the economic consequences of the war increase, fighting in Ukraine is expected to intensify. Russian forces are gathering for an expected attack in eastern Ukraine, where pro-Russian separatists have been fighting Ukrainian government forces for several years.
On Sunday, the World Bank warned that “the war has heightened concerns about a sharp global downturn.”
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The battlefield overlaps with some of the globe’s most important cropland. Ukraine and Russia together account for a quarter of world wheat exports, according to the World Bank.
Prolonged struggles in Ukraine could disrupt the annual cycle of sowing and harvesting on Ukrainian farms and disrupt global food trade after the end of 2022. Already, at least 20 percent of Ukraine’s planted wheat “can not be harvested due to direct destruction, limited access or lack of resources to harvest crops,” the United Nations Food and Agriculture Organization said last week.
The UN agency lowered its forecast for global grain trade to 469 million tonnes, a decrease of 14.6 million tonnes compared to the March estimate, citing the halt in exports from Ukraine and Russia. Lower trade volumes will put pressure on food imports across large parts of the Middle East and North Africa, raising concerns about hunger and political instability.
The impact of the war comes when the two main engines of the global economy – the United States and China – confront their own problems. China’s zero-tolerance coronavirus policy is raising supply chains, raising doubts about the government’s 5.5 percent growth target.
In the United States, the Federal Reserve is fighting to cool the highest inflation in 40 years. By driving up oil prices and consumers’ expectations of price increases, the war makes it more likely that the Fed will aggressively raise interest rates, increasing recession risks, says Mark Zandi, chief economist at Moody’s Analytics.
“The fallout from the Russian invasion of the US economy has become more problematic,” Zandi wrote in a note to customers on Monday.
The war and the subsequent sanctions have also done unexpected damage to global trade flows. Russia and Ukraine together account for less than 3 percent of global exports. But hostilities have complicated supply chains by increasing shipping and insurance costs in the Black Sea region, according to a new World Bank study on the effects of the war.
After more than two years of chronic chaos in the supply chain, the war has become another headache for the automotive, petrochemicals, agricultural and construction industries, the bank said.
Another victim of the war could be the body that coordinates the global response to major downturns, the group of 20 nations. Finance Minister Janet L. Yellen said last week that Russia should be expelled from the G-20 because of its invasion of Ukraine, adding that the United States would boycott the organization’s meetings if Russian officials participated.
Indonesia, which is hosting this year’s summit, has said Russia remains welcome.
The first test of the US stance may come on April 20, when G-20 finance ministers and central bank officials are to gather in Washington. Along with the United States, the group includes the EU, Canada, Japan, China and developing countries such as Brazil and South Africa.
“Since the financial crisis of 2008, the G-20 has been the main stabilizing force in the global economy,” said Josh Lipsky, director of the Atlantic Council’s GeoEconomics Center. “It is a very important coordinating body.”
Russia has largely coped with the initial effects of the sanctions, with the ruble returning from its original 40 percent dip to almost regain its pre-war value, aided by the introduction of controls on the movement of funds in and out of Russia. The Russian central bank last week lowered its key interest rate to 17 percent after doubling it to 20 percent to defend the ruble.
The cut suggests Russian authorities feel they can afford to lower their defenses around the ruble and make credit more affordable so companies can invest and hire.
“They have managed to put out the first fires – bank runs and potential collapse of the financial system. Now they are switching to support growth,” said Elina Ribakova, deputy chief economist at the Department of International Finance. “But there is only so much the central bank can do . “
In fact, the country is heading for a deep downturn and cracks are emerging in its economic base. S&P Global Ratings said late Friday that the Russian government was in “selective default” on its US dollar-denominated bonds after paying interest and installments on April 4 in rubles.
The Treasury – in a tightening of US sanctions – blocked US banks from receiving a dollar payment from Russia. The fund initially said U.S. investors could accept dollar payments on Russian debt until May 25.
Russian Finance Minister Anton Siluanov told the Russian newspaper Izvestia that his government would not issue new bonds this year, fearing the required interest rate would be “cosmic”, and planned legal action if forced into default.
The S&P said it did not expect the Russian government to meet its payment obligations within the 30-day grace period because “sanctions against Russia are likely to increase further.”
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As the war progresses, reports of Russian soldiers’ atrocities call for a tougher Allied response.
Europe’s payments for Russian energy products represent a lifeline for Russian President Vladimir Putin and are rebuilding the hard foreign exchange reserves that sanctions pushed.
As a result of rising oil and gas prices, Russia’s central bank said on Monday that the surplus on the country’s account – the broadest trading target – rose to $ 58.2 billion in the first quarter. That was the largest figure since 1994, and more than double the $ 22.5 billion reported in the same period last year.
EU officials are meeting today to discuss potential steps to reduce financial flows to Moscow, although Germany and other nations heavily dependent on Russia for energy remain reluctant. About half of Russia’s 6 million barrels of oil exports a day last year went to Europe.
“We have already introduced massive sanctions, but more needs to be done against the energy sector, including oil,” EU top diplomat Josep Borrell tweeted over the weekend.
Any initial move is likely to involve a gradual reduction in purchases from Russia, according to Daniel Tannebaum, a partner at Oliver Wyman in New York who advises financial institutions on sanctions.