Russia and Ukraine: these would be the global economic consequences

The invasion of Ukraine by Russia is already a fact, after the announcement of the Russian president Vladimir Putin this Thursday, February 24, which had an immediate impact on the operations of the world stock markets, foreign exchange market and safe-haven assets. Stocks around the world plummeted, while the Oil rallied above $100. Gold gained momentum and the dollar rose.

The war conflict not only affects Russians, Ukrainians or investors, it is also a blow to the coffers of all countries and to the pockets of the millions of inhabitants of this planet.

To this is added the economic sanctions imposed by the United States against Russia by cutting off its financing from the West and punishing its banks by withdrawing from the Western financial system.

Significant economic risk

Kristalina Georgieva, director of the International Monetary Fund (IMF), warned this Thursday, February 24, that the war will have repercussions on the world economic recovery.

The leader of the multilateral entity warned that the invasion of Ukraine “adds a significant economic risk to the region and the world” due to details that we explain below.

Oil rises, grains rebound and with it inflation rebounds

Russia exports 40% of its natural gas and 25% of its oil to Europe. Although it is its own industry, since it is an ally of the Organization of Oil Exporting Countries (OPEC), it does generate disruptions in its WTI and Brent peers. Along these lines, crude oil is expected to reach US$120 to US$140.

Carlo López Díaz, master’s degree in Microfinance Business Management, told La República that an interruption in deliveries of Russian oil “will impact fuel prices, because it will make other types of oil, such as WTI and Brent, more expensive.”

“We also have the options of cartels trying to increase supply through the Arabs and Americans to try to continue seeing an increase in oil prices,” said Jorge Guillén, associate professor at ESAN.

In fact, the European Union is evaluating negotiating oil from the Gulf countries as an alternative to Russian hydrocarbons.

“Supply would focus more on Europe due to purchasing power, which would also affect imports from Latin America, there would again be increases in freight rates,” said José Duarte, CEO of Firbid.

On the other hand, Russia and Ukraine export the most important grains to the world. Since 2017, the Russian nation is the world’s leading exporter of wheat. For its part, the Ukrainian nation is the world’s fourth largest exporter of corn, could become the third largest exporter of wheat, behind Russia and the United States, according to the International Grains Council.

The entity reported that in January the wheat it became 27.3% more expensive than in the same period of 2021; and the corn 14.2% more. For its part, Bloomberg reported an increase in the futures of both grains between January 10 and February 22 of 10.6% (wheat) and 10.8% (corn).

This past February 24, wheat climbed to its highest peak since 2008 in Chicago. the bushel of wheat (about 27 kg) for May delivery rose 5.65% to US$9.3475; the bushel of corn (about 25 kg) for delivery in the same month increased 1.64%, to US$ 6.9500 and the bushel of soybeans (about 27 kg) for delivery in May fell 0.80%, to 16, $6,150.

Dewey Strickler, from the consulting firm Ag Watch Market Advisors, quoted by AFP, pointed out that “interruptions in exports are feared given that Ukraine and Russia together represent 28% of world wheat exports.”

Ukraine still has about six million tons of wheat and 15 million tons of corn to ship this season, Michael Magdovitz, a senior analyst at Rabobank in London, told Bloomberg.

Duarte specified that the increase in the price of oil and the sanctions against Russia will increase the pressure on central banks worldwide to increase rates more aggressively to contain the risks of inflation, which will worsen as the conflict continues.

For Alejandro Narváez, professor of the Doctorate in Economic and Business Sciences at the Autonomous University of Madrid, this will not be possible for the European Central Bank or the Federal Reserve, because “the inflation that would be generated has nothing to do with the economic boom. Inflation is going to skyrocket due to a supply issue.”

In this scenario, the dollar would take on more relevance and this impacts emerging nations as long as the war continues or USA take some stance.

“If the US gets involved, the dollar would have a downward course,” said the specialist.

refined metals

Another item that may be affected is industrial metals, including palladium, nickel and aluminum. The latter is part of the product portfolio of the Russian group Rusal, the world’s second largest industrial producer of non-ferromagnetic metal. This February 24, the price of this reached a historical record on the London Metal Exchange (LME) when trading at US$ 3,382.50 per ton.

For nickel, Russia was the third largest producer in 2019, behind Indonesia and the Philippines, but is second (behind China) for refined nickel.

Capital Economics affirms that, after the military invasion, 7% of the world refined nickel market “could be affected” by possible sanctions against Russia.

“This metal, whose price currently marks market records, is one of the most demanded by electric battery factories, which should allow the automobile industry to abandon oil,” the firm said in a note to Bloomberg.