How will sanctions against Russia impact the global economy?
While Russia is managing the crisis to support its economy from the impact of Western sanctions, countries around the world are beginning to feel the effect of those sanctions on their own economies. Economists are raising concerns of an upcoming global recession as financial turmoil intensifies.
- Anti-Russia sanctions’ impact on global economy
Sanctions imposed by the West against Russia will have a bigger impact on global gross domestic product (GDP) than the conflict in Ukraine itself, World Bank said on Monday. The International Monetary Fund (IMF) has also warned of a ‘severe impact’ on the global economy and financial markets, saying that anti-Russia sanctions will have significant consequences for many countries.
- Global trade in tatters
Nearly all economies are already seeing a drop in international trade tied to disruptions triggered by the conflict in Ukraine and the subsequent economic sanctions, according to data by German think tank Kiel Institute. International trade has just started to recover from the pandemic-related slump in 2020 only to be hit again. The China-Europe rail freight route that goes through Russia was seeing a boom last year due to congestion in major ports, but now is suffering mounting cancellations from European clients. Sanctions on Russia are starting to wreak havoc on global trade, analysts say, pointing to devastating consequences for international importers.
- Supply chain problems intensify
Hundreds of tankers and bulk carriers have been diverted away from the Russian and Ukrainian ports in the Black Sea. Stranded at ports and at sea, the carriers are unable to unload their cargoes as a result of sanctions. Global supply chains that were working for decades have already been disrupted by the Covid-19 pandemic, resulting in massive shortages, disruptions, and price inflation. Experts say the Ukraine crisis and sanctions-caused strains could have an “earthquake like never seen before” effect on the global movement of goods and services, which will never be the same again.
- Critical food shortages
The conflict and Western sanctions could endanger the livelihoods of millions of people. Food prices, which were already on the rise since the second half of 2020, reached an all-time high in February 2022, due to high demand, input, and transportation costs, and port disruptions. The United Nations Food and Agriculture Organization said last week the current situation could trigger a global food shortage since Russia and Ukraine play a substantial role in the world’s production and supply of foodstuffs.
Data from the UN agency shows that global prices of wheat and barley rose 31% over the course of 2021. Rapeseed oil and sunflower oil prices soared by more than 60%. High demand and volatile natural gas prices have also driven up fertilizer costs. Russian President Vladimir Putin has warned that Western sanctions on Moscow could send global food prices soaring further, as Russia was one of the world’s main producers of fertilizer, which is essential to global agriculture.
- Sanctions-driven price spikes
As the United States and Europe ramp up sanctions on Russia, Western consumers will soon face higher costs for everyday products, analysts say. The price pressures come when America’s inflation rate is already at a nearly 40-year high. Russia is a leading exporter of commodities, including grains, crude oil, natural gas, coal, all metals, minerals, rare earths, wood and plastics – all used worldwide in a range of products and by a multitude of industries from steelmakers to cars to electronics. Crippling Western sanctions have already led to commodity prices hitting historic highs. Soaring energy costs have been hurting global consumers and households. Analysts warn that the costs may soon rise to unaffordable levels despite the release of strategic reserves by a number of countries.
- Sanctions blowback
Russian President Vladimir Putin has warned that sanctions imposed against his country would reverberate in the West and throughout the world. This would come in many forms, including higher food and energy prices. Meanwhile, Moscow would solve its problems and emerge stronger, he said. Russia has also begun to introduce counter-sanctions against the West, as it has banned exports of telecom, medical, auto, agricultural, electrical, and tech equipment, among other items, until the end of 2022. In total, more than 200 items were included on the export suspension list, which also covered railway cars, containers, turbines, and other goods. If Russia decides to cut off oil and gas supplies to Europe, energy prices would skyrocket and the region's economy would plunge into recession.
- Fears of global recession
A new survey by the Bank of America (BofA) shows nervous investors have started hoarding cash due to recession fears. According to BofA’s chief investment strategist, Michael Hartnett, global growth expectations among fund managers are at a 14-year low. The majority of those surveyed expect inflation to be “permanent.”
As for risks, the Russia-Ukraine crisis is seen as the number one “tail risk” for markets, followed closely by a global recession. Economists say inflation pressures had already been building before the crisis. Surging oil and gas prices have raised recession alarm bells around the world. And now the US economy has started flashing a recession warning sign.
“The recession drumbeat is gaining in volume,” Nancy Tengler, CEO and CIO of Laffer Tengler Investments, said in a report. There are many reasons to be concerned: “Soaring inflation, rising energy costs, an almost sure recession in the Euro Zone and a dangerously flat yield curve,” she explained.
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