In just a few days, the global economic outlook darkened as troops fought in Ukraine and unexpectedly powerful financial sanctions shook the Russian economy and threatened to fuel global inflation.
The price of oil, natural gas and other commodities jumped on Monday. At the same time, the heavy burden on supply chains still operating in the pandemic increased as the United States, Europe and its allies tightened the screws on Russia’s financial transactions and froze hundreds of billions of dollars in central bank assets held abroad.
Russia has long been a relatively minor player in the world economy, accounting for only 1.7% of total world production, despite its huge energy exports. In recent years, President Vladimir Putin has undertaken further isolation by building a stockpile of foreign exchange reserves, reducing national debt and even banning the import of cheese and other foods from Europe.
But while Mr Putin has ignored a number of international norms, he cannot ignore the modern and vast financial system, which is largely controlled by governments and bankers outside his country. He has mobilized tens of thousands of his troops, and in response, Allied governments have mobilized their enormous financial power.
“Now it’s a gamble between a financial watch and a military watch, to evaporate the resources to wage war,” said Julia Friedlander, director of the Atlantic Council’s Economic Governance Initiative.
Together, invasion and sanctions bring a great deal of uncertainty and instability to economic decision-making, increasing the risk to the global perspective.
The sanctions were designed to avoid disrupting the main energy exports that Europe relies on, in particular for heating homes, power plants and filling gas tanks. This has helped reduce, but not erase, the rise in energy prices caused by the war and worries about disruptions in oil and gas supplies.
Concerns about shortages have also pushed up the prices of some cereals and metals, leading to higher costs for consumers and businesses. Russia and Ukraine are also major exporters of wheat and corn, as well as base metals such as palladium, aluminum and nickel, which are used in everything from mobile phones to cars.
Eye-catching transport costs are also expected to rise.
“We’ll see prices skyrocket for the ocean and air,” said Glenn Koepke, general manager of networking at FourKites, a supply chain consulting firm in Chicago. He warned that ocean tariffs could double or triple to $ 30,000 per container from $ 10,000 per container, and that air travel costs are expected to jump even higher.
Russia has closed its airspace to 36 countries, which means that ships will have to deviate to roundabouts, which makes them spend more on fuel and probably encourages them to reduce their cargo.
“We will also see a shortage of products,” Mr Koepke said. Although it is now a slower season, he said, “companies are increasing their volumes over the summer and this will have a big impact on our supply chain.”
In a stream of updates Monday, several Wall Street analysts and economists admitted they underestimated the extent of Russia’s invasion of Ukraine and the international response. With the rapid accumulation of events, estimates of potential economic consequences ranged from mild to severe.
Inflation was already a problem, reaching its highest level in the United States since the 1980s. Now questions about how much more inflation could rise – and how the Federal Reserve and other central banks are reacting – hung over every scenario.
“The Fed is in a box, inflation is 7.5 percent, but they know that raising interest rates will destroy markets,” said Desmond Lachman, a senior fellow at the American Institute of Entrepreneurship. “The choice of policy is not a good one, so I don’t see how happy it is.
Others were more cautious about the spillover effects given the isolation of the Russian economy.
Adam Posen, president of the Peterson Institute for International Economics, said there were unpleasant questions, especially in Europe, about what the conflict would mean for inflation – and whether it was a prospect of stagflation in which economic growth slows and prices rise rapidly.
But overall, he said, “the damage is likely to be small.”
This does not mean that there will be no severe pain spots. Mr Posen noted that a handful of banks in Europe could be affected by their exposure to Russia’s financial system and that Eastern European companies could lose access to money in the country.
Thousands of people fleeing Ukraine are also moving to neighboring countries such as Poland, Moldova and Romania, which could increase their spending.
Turkey’s economy, which is already struggling, is likely to suffer a blow. Oxford Economics lowered its forecast for Turkey’s annual growth by 0.4 percentage points to 2.1 percent due to rising energy prices, financial market disruptions and declining tourism.
Russia’s attack on Ukraine and the global economy
Growing concern. Russia’s attack on Ukraine could cause dizzying spikes in energy and food prices and could scare investors. The economic damage from supply disruptions and economic sanctions would be severe in some countries and industries and unnoticed in others.
In 2021, 19% of its visitors come from Russia and 8.3% from Ukraine. Inflation, which has peaked at nearly 50 percent in two decades, is now estimated at 60 percent, Oxford said.
In the United States, the chairman of the Biden Board of Economic Advisers, Cecilia Rose, said the biggest impact on the US economy since the war has been rising gas prices. “It definitely darkened the outlook,” she told a forum in Washington.
Gasoline prices are about a dollar higher than a year ago, with a national average of $ 3.61 a gallon, according to the AAA.
Rising energy prices are hard on consumers, although they are good for producers – and the US economy has both.
Other oil-producing countries will also see revenue growth. And for Iran, which has been cut off from the global economy for years, demand for oil from other sources could help smooth talks to lift sanctions.
In the long run, the current conflict is likely to have an impact on the future budgetary decisions of several countries. German Chancellor Olaf Scholz has announced that he will increase military spending to 2 percent of his economic output.
“Defense spending has been steadily declining in the world since World War II,” Jim Reed, managing director of Deutsche Bank, said in a note Monday. Now, with this change in “geopolitical tectonic plates,” he said, priorities are changing and “those levels are likely to rise.”
In Russia, the central bank and government have taken a series of actions, including doubling key interest rates to 20 percent to boost the ruble’s attractiveness, banning people from transferring money abroad and closing the stock market to contain damage and reduce panic.
“What is happening right now is that we are looking at the breakdown of one of the largest economies on the planet,” said Karl Weinberg, chief economist at High Frequency Economics. “And from what I know about tactics, it’s a dangerous tactic.”
Peter C. Goodman and Jeanne Smialek contributed to the reporting.