Ukraine and Russia War and Its Impact on the Global Economy.

 Ukraine and Russia War and Its Impact on the Global Economy....

by M. Arshad Sohail

The war between Russia and Ukraine will seriously affect the world economy in many ways. Absolutely Changes in supply and demand for energy, wheat and other commodities will undoubtedly exacerbate global inflationary pressures.

1- SANCTIONS ON RUSSIA AND ITS IMPACT

The main sanctions against Russia include the removal of Russian banks from the Swift messaging system created for international transactions; freezing the assets of Russian companies and oligarchs in Western countries; and restrictions on the Russian central bank's use of its $630bn (£473bn) foreign exchange reserves. In response to these actions, Russia was classified as junk mail by financial institutions. In other words, the Russian default is certain.

Following the sanctions, major Western companies such as Microsoft, Samsung, Apple, Audi, BMW, Boeing, Coca-Cola, Dell, Ford, Netflix, Nike and Nestlé either left the country or closed their stores and stopped sales. Since Russia is one of the main producers of some important base metals such as titanium, nickel, palladium and aluminum, their prices are also expected to rise. This increase will affect global industries, especially the automotive industry. There will also be an increase in the prices of agricultural products due to the war. Russia and Ukraine produce more than a quarter of the world's wheat. At the same time, the prices of corn and barley will increase.

Russia is reeling under dramatic economic sanctions. Although the energy trade continues, Russia has effectively been cut off from the global financial system. The ruble exchange rate may have nominally recovered to pre-war levels. However, the real market value of the Russian currency is anyone's guess. There is no longer a free market in rubles or Russian financial assets. The Kremlin will be lucky if output falls by only 10 percent this year. The withdrawal of Western companies from Russia added to the shock. And even if a truce were to be reached, the prospects for Russia's long-term development are bleak indeed.

2-BANKS AND FINANCIAL INSTITUTIONS

Between the Bank of Russia and the private sector, Russia is estimated to contribute about $1 trillion to liquid global wealth, of which about $300 billion is located in money markets. Sanctions have nearly disrupted the $1 trillion global balance sheet, which will add to inflation and commodity prices. Switzerland, Cyprus and the UK are the biggest destinations for Russian oligarchs looking to stash their cash overseas. Cyprus attracts Russian wealth and golden passports. Financial institutions in these countries are likely to lose business due to the sanctions. The share prices of British banks Lloyds and NatWest have fallen by more than 10 percent since the invasion began.

European banks, especially in Austria, France and Italy, are badly affected by sanctions against Russia. French and Italian banks each have about $25 billion in outstanding claims on Russian debt, while Austrian banks had $17.5 billion. Since 2014, US financial institutions have been reducing their interaction with Russian banks. Still, Citigroup has a small portion of its $10 billion exposure in Russian banks. Ukraine is also on the verge of insolvency. Ukrainian bonds worth $60 billion also went into junk status.

3-INTERNATIONAL CAPITAL MARKET

that is, international capital seeks new safe havens and brings incremental international capital into China's domestic capital market, making China's financial market one of the beneficiaries of the crisis. However, China's ability to maintain environmental stability remains a major consideration for international capital flows in the face of growing geopolitical competition and conflict.

Some oil companies such as Shell and BP have decided to release assets they own in Russia. Others, such as trading and mining group Glencore, which has significant stakes in two companies linked to Russia, are reassessing their investment status. But if the value of those assets evaporates because there are no buyers at reasonable prices, companies like these could be looking at substantial write-downs.

4-GEOPOLITICAL CONFLICTS

Geopolitical conflict is intensifying, this change will have consequences for the long-term development of global financial capital markets. Geopolitical fault lines build slowly over time, tempting to postpone difficult strategic realignments, but once those lines are broken, it is often too late to do anything but react. The Russia-Ukraine war is a warning of how suddenly geopolitical movement can accelerate. Businesses should carefully consider their risk exposures. These recent events should increase the premium for domestic market strength and increase the discount for foreign companies.

Given that NATO and the West's relations with Moscow, Russian President Vladimir Putin's invasion of Ukraine is clearly a historical turning point. The atrocities committed in occupied Ukrainian communities represent a terrible violation of international law. But does Putin's war mean a turning point in the development of the world economy?

From the perspective of the combatants of 190 million people, the war is an unmitigated disaster. Ukraine's economy shrank by 16 percent in the first quarter of 2022 compared to the first quarter of last year and could shrink by 40 percent by the end of the year. He will have to rely on outside help to survive.

In addition to these two fighters, Europe will have to absorb a huge flow of refugees. The European Union will also have to deal with dramatic uncertainty in both energy supply and prices. Gas prices have recently fluctuated by up to 70 percent in a single day. Economists estimate that if German gas imports were to be cut off, which is now a distinct possibility, the economy could collapse by somewhere between 2 and 4 percent. That would be a recession on the scale of the COVID-19 crisis.

In the short term, however, the impact is not delocalization, but the search for new sources of supply. LNG tankers from around the world are making their way to terminals in France and Spain. Robert Habeck, Germany's Minister of Economy and Climate, recently signed an agreement with Qatar. It takes a supply chain to beat the supply chain. Even if Europe manages to reduce fossil fuel consumption as quickly as planned, it will require new imports of solar panels and rare earth elements to build battery systems.

Today, low-income countries make up only 9 percent of the world's population. They make up a negligible fraction of the world economy. But they all said they were home to 700 million people and their plight would send shockwaves through their regions. The vast majority of the world's population lives in middle-income countries, and several of these countries have also found themselves in need. Argentina, Lebanon, Venezuela, Zambia and Ecuador have already defaulted.

Ecuador and Zambia fall into default. But all of these countries were troubled before the pandemic. All in all, the damage done in 2020-21 was less severe than many of us expected. Pakistan lives from IMF program to IMF program. Banking analysts often point out that Tunisia will have to enter into debt negotiations in the coming months, Tunisia's debts to foreign investors are largely in foreign currency, putting it under huge financial pressures as its currency devalues. Negotiations with the IMF are not going as expected. Tunisia's political system, once hailed as the only democratic success of the 2011 Arab Spring, is in disarray. Sri Lanka is already at the point of no return. There are 13-hour blackouts, riots and now a nationwide curfew. The government has said it will continue to service its debts. It is a mistake. Continuing to service the debt will continue to drain reserves, while a potential default remains inevitable. It is good news that Sri Lanka has agreed to debt restructuring talks with the IMF.

While it may make sense for major economic powers such as China and India to speculate on new patterns of globalization, neither Tunisia nor Sri Lanka offer attractive options for retreat from globalization. In the short term, they need concessions from their main creditors and a concerted effort to revive their economies. The so-called Common Framework for Debt Restructuring approved by the G-20 group has so far attracted only three countries – Chad, Ethiopia and Zambia – and progress in reducing their debts has been disappointing.

5-Poverty, hunger and people

The World Bank's baseline projection assumes that Ukrainian poverty, based on a threshold rate of $5.50 per day, will rise from 1.8% in 2021 to 19.8% in 2022. It added that models developed by the United Nations suggest that a more severe and protracted war can lead to poverty affecting nearly 30% of the population. Citing estimates by the authors of the Center for Global Development blog, the World Bank said the latest spike in food prices could push an additional 40 million people below the poverty line of $1.90 a day.

6-Regarding energy business

Energy is a "main spillway" for Europe, with Russia being a major supplier of natural gas. The World Bank noted that the rise in European natural gas prices was particularly sharp due to its limited spare capacity, including import and export terminals, and the restriction that natural gas must be transported as liquefied natural gas. Europe has pledged to break its dependence on oil and gas imported from Russia. In the medium term, the crisis will hopefully accelerate the push for renewable energy sources and a shift away from the global trade in fossil fuels.

According to the IMF, economies dependent on oil imports would experience wider fiscal and trade deficits along with greater inflationary pressures. However, exporters in the Middle East and Africa may benefit from higher prices. In the long term, war can fundamentally change the global economic and geopolitical order if supply chains are reconfigured, payment networks fragment, energy trade shifts, and countries reevaluate their reserve currencies.

According to the International Energy Agency, "Oil prices were already rising before the war, along with a recovery in demand that accompanied the global economic recovery, and after supply concerns resurfaced as OPEC+ production fell short of expectations amid limited spare capacity."

7-Trade in commodities, especially wheat

The IMF says the consequences could include wider supply chain disruptions in addition to rising fuel prices. Disruptions, sanctions and higher commodity prices also have the potential to disrupt global value chains. This may exacerbate ongoing tensions and add to extended delivery times and high production costs for manufacturers around the world, the World Bank report said.

Although Russia and Ukraine together account for less than 3% of global exports and less than 2% of global imports, the financial body adds, the conflict and subsequent sanctions have disrupted trade links by disrupting transit routes, particularly for sea container shipping and air cargo. . Act. Higher fuel prices and insurance premiums have also increased transport costs.

8-Services and travel

The World Bank also highlighted the global impact on trade in services as travel there was disrupted by airspace closures, travel restrictions, sanctions and increased fuel prices. Russia and Ukraine are among the top 10 countries with the highest number of global departures and are a key source of income for tourism-dependent countries in Europe, East Asia Pacific, the Middle East, North Africa and South Asia.

9-Reserves and finance

In March, the World Bank pointed to the existence of high debt among emerging markets and emerging economies. According to its estimates, these economies account for about 40% of global GDP. The dilemma for policymakers was the trade-off between containing inflation and sustaining the post-pandemic economic recovery.

He added that geopolitical tensions have "darkened the outlook" for developing countries that are major importers of commodities or depend on tourism or remittances. Referring to the situation in Africa, he specified that external borrowing costs are rising and bond spreads are increasing by an average of 20 basis points.

10-Conclusion

conflict between Russia and Ukraine have massive impact on world economy and if this could not be resolved as early as possible it would lead political stability, hunger and poverty at maximum level. countries like Sri lanka, Tunisia , Pakistan and equator etc etc will bear irreparable losses. world economy would not recover in the upcoming a decade.