Ukraine war & global economy


In a month of conflict in Ukraine, global oil prices have soared, foreign companies have exited Russia and Moscow faces the spectre of default. The consequences for the global financial system if Russia cannot pay its foreign debts are likely to be limited. The United States and its allies have imposed tough financial sanctions on Russia in retaliation for its invasion of Ukraine, but Moscow so far has made debt payments. Still, concerns remain about its ability to continue to service its loans especially after the May 25 expiration of a US exemption that allows the transactions. The sanctions effectively have severed Russia’s ties to the global financial system, prohibiting most transactions except for debt payments and oil purchases. The measures also froze the government’s stockpile of $300 billion in foreign currency reserves held abroad. Moscow last week avoided default after it made a $117 million interest payment on two dollar-denominated bonds, sending funds through JPMorgan and Citigroup, which confirmed with the US Treasury Department that the transactions were allowed.
Here is a look at the economic fallout from Russia’s February 24 invasion of its neighbour:
Oil and gas prices have surged over supply fears as Russia is one of the world’s biggest producers and exporters of the fossil fuels. Brent North Sea crude, the international benchmark, stood at around $90 in February. On March 7, it jumped to $139.13, close to a 14-year high and prices remain highly volatile. Prices have risen at the pump, too, prompting governments to take measures to ease the financial pain for consumers: A lower VAT in Sweden, a price cap in Hungary, or a discount in France. Gas prices have also skyrocketed, with Europe reference Dutch TTF leaping to an all-time high at 345 euros on March 7. The United States, Canada and Britain have announced Russian oil bans. The European Union has avoided sanctions on Russia’s energy sector as countries such as Germany rely heavily on Moscow’s gas supplies. Other commodities massively produced in Russia have soared, including nickel and aluminium.
Auto industry supply chains face disruptions as key parts come from Ukraine. UN chief Antonio Guterres has warned that the conflict could reverberate far beyond Ukraine, causing a “hurricane of hunger and a meltdown of the global food system”. Russia and Ukraine are breadbaskets for the world, accounting together for 30 percent of global wheat exports. Prices of cereals and cooking oils have risen. The UN’s Food and Agriculture Organization says the number of undernourished people could increase by eight to 13 million people over the course of this year and next. Ships are not leaving Ukraine and there are concerns about the upcoming sowing season in the country. The United States, India and Europe could cover wheat shortages. But it could be more complicated to replace sunflower oil and corn, of which Ukraine is the world’s number one and number four exporter, respectively.
Stock markets had started off 2022 on a good note as economies recovered from the Covid pandemic and companies posted healthy results. But the war has brought volatility to the markets while Moscow’s stock exchange closed for three weeks and only partially reopened on Monday. Western sanctions have paralysed the Russian banking sector and financial system, while the ruble has collapsed. The measures include efforts to freeze $300 billion of Russia’s foreign currency reserves held abroad. Russia now faces the risk of defaulting on debt for the first time in decades.

Moscow paid interest on two dollar-denominated bonds last week, giving the government some breathing room until the next debt payments in the coming weeks. Hundreds of Western firms have closed shops and offices in Russia since the war started — due to the sanctions, political pressure or public opinion. The list includes famous names such as Ikea, Coca-Cola and MacDonald’s.