The powerful Western counter-attack will not succeed in stopping the barbaric aggression suffered by the Ukrainians, but will impose a heavy price on Russia. All countries will suffer from the conflict, some more than others.
Posted yesterday at 9:00 a.m.
Vladimir Putin claims that the West has declared economic war on Russia. For once, he is telling the truth. Our governments have imposed the toughest sanctions, compounded by market and corporate reaction.
The first round of measures hit the oligarchs, the president and his inner circle with travel bans and the freezing of their assets abroad.
Next, several Russian banks were disconnected from the global SWIFT messaging network, which facilitates interbank transactions. Note the exception made to the two institutions through which European payments for Russian oil and gas deliveries pass.
The spectacular coup, promoted by Canada, was to freeze 60% of Russia’s central bank’s huge foreign exchange reserves, the portion it holds in Western countries. By prohibiting major financial institutions from negotiating with it on the foreign exchange market, it is prevented from supporting the ruble or financing imports.
Flight bans over the European Union and several countries have blocked most international flights connecting Russia. Domestic flights will also be affected, as the sale of parts needed to maintain Boeing and Airbus aircraft has also been banned.
More critical in the long run, the West has cut off access to its high technology, from microprocessors to drilling equipment.
A complementary and unprecedented offensive came from the 300 multinationals which voluntarily announced the temporary or permanent cessation of their activities in Russia.
In short, all of these actions are plunging the Russian economy into a deep recession and condemning it to anemic growth for many years.
In an attempt to limit the damage, Russia doubled its interest rate to 20%, imposed capital controls and closed the Moscow Stock Exchange, which did not prevent the ruble from losing 36% of its value against the US dollar, nor the fall of Russian shares also listed outside the country. The same applies to government bonds denominated in dollars and euros, subject to probable default.
Financial losses for Western investors and companies will be significant, but not so severe due to Russia’s generally small weight in portfolios and turnovers, even if Putin is now threatening to seize the assets of firms ceasing operations in Russia.
A big gas station
Russia may be a military superpower with 5,000 nuclear warheads, but its GDP is 25% smaller than Canada’s. It is “incredibly unimportant in the global economy, except for oil and gas,” Harvard economics professor Jason Furman told the BBC. “It’s basically a big gas station! »
This country is the largest exporter of gas in the world and the second in oil. Unfortunately, the European Union depends on it for 40% of its gas consumption and for 27% of its oil.
Before the war, energy prices were already on the rise with the economic recovery. The wholesale price of gas in Europe is now 20 times higher than last year, while that of Brent has risen by two thirds. Russia benefits greatly from this, which allows it to finance its costly war in Ukraine.
To break this twisted relationship, Europe has just announced its intention to reduce its purchases of Russian gas by two thirds by the end of the year by importing more liquefied gas from elsewhere, by accelerating investments in energy renewables and reducing consumption.
The plan to replace Russian oil remains unclear, as there is no quick fix in the short term. Only countries with little or no dependence, such as the United States and Canada, give up easily.
The second inflationary shock caused by the war affects cereals. Russia and Ukraine produce 30% of the world’s wheat and are respectively the leading and fifth exporters. The price per bushel is up 37% since the start of the conflict.
Global consequences
Global inflation is getting worse. Worse, it undermines consumer confidence and will slow economic growth. In Europe, the risk of recession is high. In North America, this risk is partly offset by the fact that hydrocarbon and grain producers are taking advantage of high prices. Poor oil-importing countries will suffer, as will low-wage earners in rich countries, because food is a big part of their spending.
In other words, the global economy is facing the likely return of stagflation, something not seen since the two oil shocks of the 1970s.
Although oil plays a much lesser role in the economy these days, the combination of high inflation and weak or negative growth will pose a dilemma for central banks: brake or accelerator?
Governments will also be faced with heartbreaking choices: how much to increase military spending in budgets under pressure? How to reconcile energy security and the necessary decarbonization of the economy?
Banished from the Western world, Russia will seek refuge in the arms of China, but how far will their recent alliance go? For now, despite President Xi’s comforting statements, China is refusing to deliver the Boeing and Airbus parts that Putin needs for his planes.
The battlefield is shrouded in the fog of war described by Prussian General Carl von Clausewitz. It is far too early to find answers to these questions. In the meantime, one can only hope for the best for the brave Ukrainians.