From food to inflation, the Russia-Ukraine war has a global impact
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Witness a protestor yelling during an anti-Russian demonstration at Trafalgar Square, London, England on February 27, 2022. Russia’s invasion of Ukraine on a large scale has caused protests in Europe.
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Nobody knew the extent of the conflict that ensued from Russia’s invading Ukraine, nor the depth of the shockwaves that were sent throughout Europe and the rest the globe.
The economic consequences of the conflict are becoming more apparent as the war nears its third month. It is not looking good.
The backdrop is already chaotic with rising inflation and high food and energy costs, as well as disrupted supply chain due to the coronavirus pandemic. Now, Russia’s war against Ukraine is increasing supply and demand tensions and threatening consumer sentiment.
Tension in the markets
The war is entering a new phase. There has been fierce fighting in the eastern part of the country. This continues to be the focus of global financial markets. with analysts saying the “battle for Donbas” could be determine the outcome of the war.
Investors are rattled by rampant inflation and its dampening effect on global growth — the international Monetary Fund predicts the U.S. inflation rate will reach 7.7% this year and 5.3% in the euro zone. Investors selling bonds is a reaction to the rising cost of living. This has driven yields higher. 10-year Treasury noteThe level was 2.94% on Tuesday, an all-time high that has not been seen since the end of 2018.
Traders in the NYSE Floor, April 14th 2022.
Source: NYSE
Growth in the global economy hit
Whatever happens at the frontline in the coming days or weeks, shock waves caused by conflict will continue to resonate around the world with the World Bank and IMF both lowering global growth projections.
The IMF cut its global growth projections for 2022 and 2023 on Tuesday, saying the economic impact from Russia’s invasion of Ukraine will “propagate far and wide, adding to price pressures and exacerbating significant policy challenges.” In the meantime, the World Bank reduced its global growth forecasts for 2022 to 4.1% from 3.2%. This was due to the increased pressure Russia’s invasion has put on the world economy.
A supermarket in Spain was crowded with customers. The European sanctions against Russia have led to an increase in prices for basic foods like oil and cereals.
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Both institutions said the downgrades to their forecasts had been made as they expected supply shocks to intensify, and for commodity prices — of which Russia and Ukraine are major suppliers — to rise dramatically.
Russia, along with Ukraine, is a significant supplier of oil, metals, as well the wheat and corn. The IMF stated Tuesday that reduced supplies have caused their prices to rise sharply.
CNBC spoke Wednesday with Jari Stehn from Goldman Sachs as chief European economist. She said that Europe was feeling the pinch of Ukraine’s war.
The general picture is that the euro zone economy slows pretty quickly due to much higher inflation, which is beginning to impact incomes and consumption and…energy prices being a burden on producers. Stehn stated that the “SquawkBox Europe” program has exacerbated supply chain issues due to Ukraine’s war.
Food price rises
With the war converging with other disruptions — supply-chain strains, inflation and the pandemic — it is now posing “a looming threat to our global food supply,” Daniel Aminetzah, leader of McKinsey’s Chemicals and Agriculture Practices, and Nicolas Denis, a partner at the management consulting firm, said in the company’s latest podcast Wednesday.
The Ukraine–Russia region is seen as one of a small handful of global “breadbaskets” (or major food producers) and plays a vital role not only as an exporter of primary staples like wheat, but also as one of the major suppliers of fertilizer worldwide.
There are six breadbaskets which together provide 60 to 70% of all global agricultural commodities. The Ukraine–Russia region is responsible for roughly 30% of global exports of wheat and 65% of sunflower, in a context where those markets are increasingly tight and interconnected—so a slight disruption in supply creates some impact on price,” Denis noted.
Aminetzah explained that when we look at the global food supply chain in general, we can see “this conflict shaking important foundations of this system within an already disturbed context”.
“In the global food system, previous supply–demand scenarios were mostly encoded around weather and other supply-related events … But now, we are in an unimaginable situation: a war of this scale in Europe, in such a critical food supply hub — especially when it comes to wheat and to fertilizers — as the Black Sea,” he added.
The Russian-Ukraine conflict has seen some global prices rise for certain grains. Both countries contribute a large percentage to the supply of some commodities like wheat.
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He described this as an “instability” that will cause disruptions in food supply chains. Aminetzah acknowledged it is difficult to predict the consequences, but he said “this crisis would have clear secondary impacts on other breadbaskets such as Brazil”.
According to the IMF, rising food costs could also have an adverse impact on society. The Fund stated that rising fuel and food prices might also lead to more social unrest in the poorer nations.
Financial conditions became more difficult for developing and emerging countries immediately after the invasion. This repricing so far has been relatively orderly. The IMF stated that there were still financial fragility risk, raising concerns about a sharp tightening in global financial conditions, as well as potential capital outflows.
The extent of the economic impact is dependent on both the duration of war and the severity of any disruptions it causes.
Russia’s refusal to abide by international sanctions against vital areas of its economy is not a sign of weakness. The country has been hit with numerous sanctions, including those that affect its oil and financial systems. But analysts say that sanctions won’t deter Russian President Vladimir Putin, despite his stated intentions in Ukraine.
They are likely to aim to annexe, at minimum, eastern Ukraine’s Donbas and create a land bridge from Crimea to Russia to facilitate Russia’s military and commerce. If not, they may also seek to seize Kyiv’s capital and remove the pro-Western government.
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