The protracted war in Ukraine will mark a recession for the world economy

With no signs of an immediate end to the war in Ukraine, the risk of this conflict pushing the weak world economy into recession is increasing.

In its first seven weeks, the war has already triggered a massive influx of Ukrainian refugees, raising food and oil prices, raising inflation and reducing the chances of European growth.

US and its allies’ financial sanctions designed to punish Moscow have put a strain on the Russian economy, prompting the expulsion of hundreds of multinational corporations and pushing the government to the brink of its first default on 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 burden will develop.

On Tuesday, the World Trade Organization cut its growth forecast for this year to 4.8 percent from 4.1 percent before the war, saying the conflict had dealt a “severe blow” to the world economy.

Gregory Taco, chief economist at Ernst & Young, said a protracted war – and further escalation of sanctions by Russia’s allies – could remove up to two percentage points from global growth.

Wall Street economists expect the global economy to expand by 3.5 percent this year, down from 4 percent in March, according to Bloomberg’s April survey.

“This condition lasts a long time and the itching becomes very noticeable,” Taco said.

As inflation rises, price rises fuel the fees of corporate greed

Despite repeated threats by Moscow earlier this year to act against Kyiv, the February 24 invasion surprised government leaders, business executives and economists, who expected 2022 to be the year of recovery from the corona virus epidemic. Instead, they find themselves struggling with a major European conflict that seems to be protracted.

General Mark A. Millie, head of the Coalition, told Congress earlier this month that the war in Ukraine would be “measured in years.” NATO President Jens Stoltenberg and White House National Security Adviser Jake Sullivan have made similar comments in recent days.

The war in Ukraine is expected to intensify as concerns about the economic consequences of the war mount. Russian forces are concentrating on an expected offensive in eastern Ukraine, where pro-Russian separatists have been fighting with Ukrainian government forces for years.

On Sunday, the World Bank warned that “war has added to growing concerns about a sharp global recession.”

Prices rose 8.5 percent in March compared to the same month last year

The battlefield overlaps with the most important farmlands in the world. According to the World Bank, Ukraine and Russia together account for a quarter of world wheat exports.

Prolonged fighting in Ukraine could disrupt the annual cycle of sowing and harvesting on Ukrainian farms, disrupting global food trade by the end of 2022. Already, at least 20 percent of wheat grown in Ukraine “may not be harvested due to direct destruction, restricted access, or a lack of resources to harvest the crop,” the UN Food and Agriculture Organization said last week.

The UN has lowered its forecast for the global grain trade to 469 million tonnes, citing exports from Ukraine and Russia. Low trade levels will paralyze food imports across much of the Middle East and North Africa, raising concerns about hunger and political instability.

The impact of war comes when two major engines of the world economy – the United States and China – face their own problems. China’s zero tolerance corona virus policy improves supply chains and raises doubts about the government’s 5.5 percent growth target.

In the United States, the Federal Reserve is struggling to reduce inflation to a 40-year high. Mark Jandy, chief economist at Moody’s Analytics, said the central bank would aggressively raise rates and increase the risk of a recession as oil prices and rising prices increased consumer expectations.

“The fall of the Russian invasion has made sense in the US economy,” Jandy wrote in a note to clients on Monday.

The war and its subsequent sanctions have caused unexpected damage to world trade flows. Russia and Ukraine together account for less than 3 percent of global exports. But according to a New World Bank study of the effects of war, wars have created complex supply chains by raising shipping and insurance costs across the Black Sea.

The bank said the war has become another headache for the automotive, petrochemicals, agriculture and construction industries after more than two years of supply chain destruction.

Another impact of the war could be an organization coordinating a global response to the Great Depression, a group of 20 nations. Secretary of the Treasury Janet L. Yellen said last week that Russia should be expelled from the G-20 in connection with the occupation of Ukraine, and that the United States would boycott meetings of the G20 if Russian officials attended.

Indonesia, which is hosting the summit this year, said Russia would continue to welcome it.

The first test of the US position may come on April 20, when G-20 finance ministers and central bank officials will be in Washington. Along with the United States, the group includes the European Union, Canada, Japan, China and developing countries Brazil and South Africa.

“Since the 2008 financial crisis, the G-20 has been the most important stabilizing force in the global economy,” said Josh Lipsky, director of the Atlantic Council’s Center for Geo-Economics. “It’s a very important integration system.”

Russia has been hit hard by the initial effects of sanctions, with the ruble recovering from its initial 40 percent decline, almost restoring its pre-war value, which was helped by the imposition of restrictions on the movement of funds inside and outside Russia. Last week, the Russian central bank cut its key interest rate to 17 percent and then doubled it to 20 percent to protect the ruble.

The cut comes as Russian officials believe they can reduce their security in rubles and make loans more affordable so companies can invest and hire.

“They were able to put out the first fire – a possible collapse of the banking system and the financial system. Now, they are turning to support growth,” said Elena Ripakova, deputy chief economist at the Institute of International Finance. “But that’s all the central bank can do.”

In fact, the country is heading for a deep decline and cracks appear in its financial base. S&P Global Ratings said on Friday that the Russian government was “selectively default” after paying interest and principal on its US dollar-denominated bonds in rubles.

The Treasury Department – in a bid to tighten US sanctions – has prevented US banks from receiving dollars from Russia. The department initially said U.S. investors could accept dollar payments on the Russian loan until May 25.

Russian Finance Minister Anton Siluanov told the Russian newspaper Izvestia that his government would not issue any new bonds this year, fearing that the required interest rate would be “cosmic” and that legal action would be planned if forced.

S&P said it did not expect the Russian government to fulfill its tariff obligations within the 30-day grace period, as “sanctions on Russia may be further increased.”

Russia’s invasion of Ukraine could be a global economic ‘game changer’

As the war intensifies, reports of atrocities by Russian soldiers call for a stern friendly retaliation.

Europe’s payments for Russian energy products represent a lifeline for Russian President Vladimir Putin, and sanctions are filling tight currency reserves.

Russia’s central bank surplused $ 58.2 billion in first-quarter trade on Monday, reflecting rising oil and gas prices. This is the largest number since 1994, and more than double the $ 22.5 billion announced during the same period last year.

EU officials are meeting today to discuss possible measures to reduce the flow of funds to Moscow, despite the reluctance of other countries that rely heavily on Germany and Russia for energy. Half of Russia’s 6 million barrels a day of oil exports went to Europe last year.

“We have already imposed massive sanctions, but there is still much to be done in the energy sector, including oil,” EU top ambassador Joseph Borel tweeted over the weekend.

Daniel Donnebaum, Oliver Wyman’s partner in New York, said he would gradually reduce any initial action to buy from Russia, as he advises financial institutions on sanctions.

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