Exploding prices, energy and aviation crisis: What will the blowback be from anti-Russia sanctions?
Unprecedented Western sanctions over the war in Ukraine have had a substantial impact on the Russian economy. But the attempt to isolate Moscow financially now threatens the very countries that imposed them. The global economy is already feeling the negative impact as prices for critical commodities such as oil, gas, and grain are soaring. Sanctions targeting Russia are beginning to have a major economic cost for the US and European economies, and other countries across the globe, economists say.
- Soaring energy prices hurting global consumers and households
The biggest and most immediate impact of sanctions is being felt in the petroleum and natural gas sectors, where Russia is one of the top exporters. Energy prices are now climbing at the fastest rate in 50 years, putting pressure on businesses and household finances. Oil prices surged to their highest level in more than a decade, surpassing $130 per barrel this week. Wholesale natural gas costs are already at record levels, with prices in Europe having exceeded $3,900 per 1,000 cubic meters for the first time in history. Gasoline prices are the most expensive in US history, with the price for a gallon of regular petrol reaching $4.17 as of Tuesday, according to data by the American Automobile Association. Prices at the pumps in Europe are even higher. They have nearly doubled since anti-Russia sanctions were introduced to around €2 for a liter ($8.25/gallon). Energy costs may soon rise to unaffordable levels despite the release of strategic reserves by a number of countries, analysts warn.
- Full-blown energy crisis could lead to global recession
A cutoff of Russia’s energy industry could mean severe consequences not just for Europe, but also for the US and the rest of the world as well. Washington announced this week a ban on Russian hydrocarbons, sending crude prices to near-record highs. Europe also said it plans to slash consumption of Russian natural gas this year as it prepares for a complete break with its single biggest energy supplier. Russia has indicated it could cut oil and gas exports if economic warfare continues to escalate. Such a move could trigger an immediate full-blown energy crisis, experts warn. The economic consequences of the spiraling energy prices are already “very serious,” according to the International Monetary Fund. Analysts say there is no way the United States and Europe could replace Russian oil and gas supplies fully within the next 12 months or absorb the consequences of a further price surge without entering recession. European economies, which are heavily reliant on Russian energy supplies, are particularly at risk of heading into a downturn, they warn.
- Threat of inflation
Over the past two years, governments around the world have printed massive amounts of money to deal with the impact of the economic slowdown due to the Covid-19 pandemic. The resulting inflation, particularly in Western countries like the United States, has been surging to near-record levels. The last thing the global economy needed during the recovery was higher energy prices. The disruption of global energy markets and the subsequent surge in oil and gas prices due to the economic pressure on Russia means the price for all consumer goods will continue to soar.
- Surging global food prices
Sanctions against Moscow could derail the already reduced exports of food and critical agriculture-related goods from global breadbaskets Ukraine and Russia. The two countries account for 30% of global wheat exports. Experts warn that supplies of agricultural fertilizers may also decrease around the world due to sanctions on Russia and Belarus, which together control more than a third of the world’s potash production, a key ingredient in fertilizer. Russia also controls 14% of nitrogen-based plant food production, according to the research firm CFRA. Ultimately, the impact will be higher food costs around the world, experts say.
- Global aviation industry feels impact of Russia sanctions
The flight ban imposed by over 30 countries on Russian airlines and Moscow’s mirror response is having a ripple effect on global travel and the airline industry, which is already battered by the coronavirus pandemic. Manufacturers, lessors, insurers and maintenance providers to Russian carriers like Aeroflot and S7 Airlines are among those outside Russia that are hit directly by sanctions. Airlines are currently reeling from higher oil prices and longer routes needed to bypass Russian airspace. Those factors are expected to drive up ticket prices and air freight rates further. Moreover, the European Union has given leasing companies until March 28 to wind up current rental contracts in Russia. That could be a challenging task for the European companies that have leased hundreds of planes to Russian airlines and now must find a way to fly them out amid the airspace bans and Russian government’s plans to nationalize the fleet to maintain domestic capacity. The huge number of planes needing to be placed elsewhere could depress rental prices globally, analysts say. Additionally, major Western plane makers, Airbus and Boeing, will be hurt from Russia’s isolation. Not only are they losing a huge market, but Russia provides critical components such as titanium for the production of their aircraft, which will now cost more to make.
- Prices for other commodities exploding
Russia is a major exporter of other commodities that are critical for the global economy. Prices for these have also been soaring, hitting their highest levels in years and hurting global economic growth. The skyrocketing price of metals has hit car manufacturers hard, as Russian supplies are at risk. Aluminum and palladium both hit record highs on Monday while, on Tuesday, nickel, which is also needed for stainless steel, passed the $100,000-a-tonne level for the first time ever. The price of coal surged to unprecedented levels, exceeding $400 per ton this week as some European countries look to ban Russian supplies. The cost of rare earths, which has surged since the second half of 2021 amid concerns of supply uncertainty and strong demand, is also on the rise.
- Russian isolation hurts European businesses
Russia has enjoyed close economic ties with European countries, so any trade and financial sanctions are likely to hurt both sides. But the loss of the Russian market, with a population of over 144 million people, is a huge blow to European businesses. During 2021, the volume of trade between Russia and the countries of the European Union increased by 42.7% in annual terms to over €247 billion. Russia was the fifth largest partner for EU exports of goods (4.1 %) and the third largest partner for EU imports of goods (7.5 %). The EU has already imposed several rounds of severe sanctions against Moscow, targeting the country’s banking and industrial sector, freezing its foreign reserves, and causing a mass exodus of foreign businesses from the country.
- Who will suffer most from Western sanctions?
Analysts say that European countries and businesses will bear the price of Western sanctions, adding that if Russia reorients itself toward friendly countries like China, “Europe would suffer the most.” The White House said recently that China’s trade with Russia isn’t enough to offset the impact of US and European sanctions on Moscow. However, trade between the two countries has been booming despite the events in Ukraine. According to Chinese customs data released on Monday, the trade turnover between the two countries increased by nearly 39% in the first two months of this year compared to the same period last year, exceeding $26 billion. Moscow and Beijing have an ambitious goal of boosting bilateral economic cooperation to $200 billion by 2024.
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