The worst effect of Russia-Ukraine conflict on the world economy is the rise in commodity prices. EIU stated in its global outlook report that oil prices will not fall below $100/barrel as long as conflict continues.
Market tightening will be exacerbated by the threat of sanctions against Russian hydrocarbon exports, and uncertainty around supplies. After a fivefold increase in prices last year, European gas will be priced at 65% this year. Europe has a limited stock of gas, and there are worries about gas supplies in the 2022/23 northern-hemisphere winter seasons. Europe is decreasing its demand for Russian natural gas, which will reduce Russian output and increase supply pressures, Agathe Demarais (Global Forecasting Director, EIU) stated.
EIU stated that higher commodity prices will fuel global inflation. This year’s spike will be 7.7 percent, a 26-year record.
The central banks of major countries are increasing efforts to manage inflation, despite concerns over the effect of the Russia-Ukraine war on their economies. The Federal Reserve (the US central bank) is expected to raise rates by 225bps in 2022. They will also begin balance-sheet runoff. According to the report, the European Central Bank will no longer be offering quantitative easing at the end June 2022.
Russia is also a major supplier of many base metals including nickel, titanium, palladium, palladium, and aluminium. After last year’s spikes on all these markets, prices will stay at their peak levels as long as the conflict goes on. This will have a significant impact on the industrial sectors, such as the automotive sector, across the globe but especially in Europe. The price of agricultural commodities such as wheat, maize and barley (as well as rapeseed) is expected to soar. Together, Russia and Ukraine account for more than 25% of global wheat trade. They also produce 12 percent of the calories consumed worldwide.
Global economic disruptions, including financial sanctions and higher commodity prices, are being caused by the conflict between Russia & Ukraine. These transmission channels work together to cause inflation to rise and slow down growth, particularly in Europe. EIU stated that this situation will continue throughout the year. We expect the war to last at least until 2022.
The West has placed sanctions on Russia with the intention of crippling its economy. We now expect that these will remain in effect for the entire forecast period (2022-2026). The most harmful sanctions are those against the Central Bank of Russia (CBR). They prevent the CBR access to about half of US $643 billion in foreign-exchange reserves. This includes preventing it from converting assets in US dollars or euros into roubles. They also limit Russia’s ability to pay its external debt obligations. According to the Economist Intelligence Unit, (EIU), we expect Russia to default on its foreign currency sovereign debt but don’t expect it to cause a global financial crisis.”