Economic impact of Russia-Ukraine conflict: Global macro in 2022/2023

News: The Russia-Ukraine conflict has the potential of creating macroeconomic/financial crises in many countries.

What is the vulnerability of dependence on Russian oil and gas?

Before invading Ukraine, Russia was the world’s biggest exporter of oil, at about 8 million barrels a day. In addition, about a third of Europe’s gas supply came from Russia.

Russia’s gross domestic product (GDP) is of Spain’s size, with strengths in two fields: Natural resources and food. Hence, the energy export cash flow is critical to the Russian economy and funds the war in Ukraine.

What is the present status of the Russian oil and gas?

Around 85% of individuals in Europe were in favour of reducing energy dependence on Russia. In recent months, Russian gas sales to Poland, Bulgaria and Finland have been shut off. This is visible from,

a) LNG imports into Europe have surged. Their demand for LNG is also driving up its global price, which influences all users, including ones in India. b) Carbon transition investments are taking place at an unprecedented pace all over Europe.

What is the economic impact at the global level due to higher oil prices?

Depreciate savings: For energy-importing countries worldwide, in the short term, there is negligible price elasticity. Hence, higher import prices are tantamount to a consumption tax and result in a reduction in savings.

Shake the foundation of debt stability: Long years of sustained low-interest rates in the world economy, coupled with the pandemic, have led to a significant build-up of debt.

If the prices of oil increase, then the foundation of debt stability of the borrowers will also be shaken. For example, Italy by 2023, could be in the grip of an expanding debt /GDP ratio.

‘Developing markets’ (DM) interest rates go up: Central banks worldwide are freshly conscious about the problems of inflation and are tightening monetary policy. As the US Fed hikes the interest rates, the global capital also starts retreating.

Other impacts: Some firms will face credit stress. Some ponzi schemes will get unveiled.

What is the critical Importance of good economic machinery?

The need for enlarged capital inflows to fund the gap between investment and savings in many energy importing countries. This is required a) At a time when debt levels are unprecedentedly high, b) At a time of slow global growth in GDP and trade, and c) In a period of unprecedented DM monetary tightening.

The benefit of floating exchange rate: In countries with good institutions, there is capital account convertibility and inflation targeting. In these countries, the exchange rate depreciates, and more foreign capital without any friction comes in.

In other countries: In places where these machineries are not in place, they might get some episodes of economic distress. Some countries will mishandle macro policy and experience macroeconomic/financial crises.

Source: The post is based on an article “Global macro in 2022/2023” published in the “Business Standard” on 12^th June 2022.