In addition to the suffering and humanitarian crisis from the Russian invasion of Ukraine, the global economy will feel the impact of slower growth, higher inflation and a recalibration of energy policies. Because Russia and Ukraine are major commodities producers, the war has caused global prices to soar, especially for oil, natural gas and grain.
The International Monetary Fund highlighted three concerns:
- Higher prices for commodities such as food and energy will increase inflation. This has put pressure on governments worldwide to increase their debt to alleviate the misery of their constituents. We can anticipate political unrest from Sub-Saharan Africa and Latin America to the Caucasus and Central Asia. Egypt, for example, imports 80% of its wheat from Russia and Ukraine.
- Ukraine’s neighbors will grapple with trade barriers, disrupted supply chains and a historic surge in refugees.
- Reduced business confidence and higher investor uncertainty may reduce asset values, tighten financial conditions and spur capital outflows from emerging markets.
‘Prepare for the potential negative outcomes’
Jamie Dimon, chief executive of J.P. Morgan Chase, wrote in his annual letter, “the U.S. is facing unprecedented risks that have him (his bank) preparing for dramatic upheavals. While it is possible, and hopeful, that all of these events will have peaceful resolutions, we should prepare for the potential negative outcomes.” Dimon added that “the Federal Reserve could move interest rates higher than the markets expect.”
The Wall Street Journal reported that Russia’s invasion of Ukraine has “led countries to tear up their timelines to transition from fossil fuels. In their desire to reduce their dependence upon cheap Russian oil and gas, countries are simultaneously rushing toward and away from oil, gas and coal.”
Roberta Downey, a London-partner with Vinson & Elkins, wrote, “You cannot get renewables on stream fast enough for the pace of sanctions.”
In the immediate aftermath of the Ukraine invasion, many countries are leaning on fossil fuels. They are trying to lock up enough supply from non-Russian sources, including more coal in order to heat homes, power factories and transport goods over the next few years.
The crisis is critical for Europe. Unlike America, the European Union has not banned imports of Russian oil and gas. Europe relies on Russia for about one-third of its oil and 40 percent of its natural gas. The United States by contrast only imports 3 percent of the oil that it consumes from Russia and none of its natural gas. Traditionally, these countries acquired inexpensive Russian supplies of oil and gas. As an alternative to Russian sources, the U.S. now plans on shipping more liquified natural gas to Europe.
Germany reconsiders its energy policy
In the wake of the Russian invasion, German Chancellor Olaf Scholz reversed his country’s decades-long national energy policy. Historically, Germany has been Russia’s most important customer. According to Bloomberg, Russia now supplies more than half of Germany’s gas, half of its coal and about a third of its oil. The dependence deepened after the Fukushima nuclear meltdown in 2011, when Angela Merkel committed to closing all of Germany’s nuclear plants.
Until recently, German leaders did not see their dependency on Russia as a problem. Instead, they believed that their economic links were integral to keeping peace and integrating Russia into the rest of Europe.
Other European countries are reconsidering their sources of energy. The Belgium government might postpone long-standing plans to decommission two 1980s-era nuclear reactors by 2025.
The United Kingdom plans to increase investment in solar projects and offshore wind power. In addition, the U.K. is examining new investment and production in the North Sea and is extending the lifespans of coal-fired power plants.
The war in Ukraine has led to supply problems and higher prices for energy, raw materials, commodities, oil and food. In summary, it has created devastating repercussions.
Originally published in the Sarasota Herald-Tribune
