The war in Ukraine is already having a catastrophic impact on the global economy

In deciding to invade Ukraine, Putin not only caused the deaths of thousands and disrupted the existence of millions of others, he called into question the fragile global food balance, disrupted energy chains, and undermined already insufficient efforts to reduce greenhouse gas emissions. and triggered a new arms race. A destructive action, the consequences of which will be long-term negative for the entire globe!

It is said that history does not repeat itself, but tragic events have an unfortunate tendency to repeat themselves, perhaps in new forms, but with hopelessly similar consequences. During the Cold War, the balance of nuclear terror encouraged the great rival powers, the US and the USSR, never to confront each other directly, but their rivalry led to localized conflicts, where each of them armed and supported more or less openly hostile forces in Asia, Africa or Latin America. America.

With the fall of the Soviet regime, Putin’s takeover of Russia, and the rise of China, we are no longer in a bipolar world, the game has become a bit more difficult, but always with the concern of avoiding a major conflagration, conflicts remain geographically limited. In the event of an invasion of Ukraine, a world war will certainly be avoided, but the consequences of the conflict will be very serious far beyond the combat zone.

Global growth has slowed down

The International Monetary Fund has yet to adjust its global growth forecast, which it estimated in January at 4.4% in 2022 and 3.8% in 2023, a gradual slowdown from 5.9% recorded in 2021, but the numbers which he is expected to announce in mid-April at his spring meeting will likely be substantially lower.

Russia and Ukraine account for only 2% of global GDP, but they play an important role in the trade of several essential commodities.

The decline in activity that will be recorded around the world cannot be entirely due to the invasion of Ukraine by the Russian army; already in January, the IMF expected a very sharp decline in US growth, which was supposed to fall from 5.6% in 2021 to 4% this year and 2.6% next year, which puts a lot of pressure on world statistics.

The US economy was on the verge of overheating and needed to slow down; The first increase in the key rate by the US central bank, announced on March 16, did not come as a surprise. And containment measures taken in China will cause further disruptions to international trade. But the war in Ukraine will hit countries that should have been up or down moderately active this year.

At first glance, such an impact of this event on the world as a whole may seem surprising: according to OECD economists, Russia and Ukraine together account for only 2% of world GDP and the same percentage of trade turnover. The problem is that these two countries play an important role in the trade of several essential products: about 30% of world wheat exports, 20% of corn, mineral fertilizers and gas, and 11% of oil.

And if we add their role in supplying the rest of the world with palladium, nickel and other metals used in a number of industries, including automotive and aviation, we see that the opportunities to harm Russia far exceed its economic weight.

Runaway inflation

For the world as a whole, the OECD estimated in mid-March that the fall in GDP could be just over one percentage point in the first year, while consumer price increases could approach 2.5 points. The Eurozone, given its proximity and dependence on the two countries, will see a negative impact on its annual GDP of 1.4 points. The Rexecode institute cut its growth forecast for France from 3.7% to 2.9% this year and from 0.7% to 0.4% next year.

Differences by country should be noted: countries bordering Russia and Ukraine are the most vulnerable; in Western Europe, Germany and Italy, highly dependent on Russian gas, have suffered more than France, Spain or Portugal. In addition to the risk of supply shortages, there are higher inflationary pressures in these countries.

The inflationary decline can be attributed almost exclusively to rising energy prices: 44.7% per year, according to Eurostat.

According to INSEE estimates, price growth in France in March amounted to 4.5% y/y. Eurostat has a slightly higher estimate of 5.1%, which nevertheless remains much lower than the euro area as a whole (7.5%) and well below the levels achieved in some countries: 15.6% in Lithuania , 14.8% in Estonia, 11.9%. % in the Netherlands, etc. Only in Malta, the annual price increase would be slightly lower than ours, by 4.6%.

It can be seen that this inflationary lag can be explained almost exclusively by rising energy prices: 44.7% per year according to Eurostat!

Scattered subcontracting networks

If the sharp rise in the prices of gas and oil products is the most noticeable phenomenon here, then the conflict has other, less noticeable consequences.

Take the example reported by the French and Israeli Chambers of Commerce and Industry: Israeli high-tech companies suddenly lost some of the computer engineers they needed. They used to serve mainly Indian contractors, but Ukraine has clearly taken the lead over the past few years: it is closer, in the same time zone, and given the average salary of $220 a month in this country, a programmer is very happy to work for $2,500 a month to Israeli companies; and these are also very pleased, because a local engineer would have to pay at least four times as much.

With the outbreak of war, this network of subcontractors was eliminated, and Israeli companies hastily turned to India and the Philippines. But the network is not restored overnight. It is likely that the development of many of them will be stopped, and it is possible that some will go bankrupt.

Before the war, 220,000 Ukrainian programmers (of which only 20,000 were hired by Israeli companies) brought their country over $3 billion a year; many European companies are also concerned.

War in Ukraine, famine in Africa

But no matter how difficult the situation is for countries that have to deal with interruptions in the supply of certain goods or services, no matter how difficult the social problems are due to the influx of refugees and the consequences of rising prices for the poorest segments of the population. Europe and other developed countries, the worst is somewhere else.

The rising cost of food and energy could lead to major social unrest in some parts of the world.

“War in Ukraine means famine in Africa”, exclaimed Kristalina Georgieva., Managing Director of the IMF. The danger is real. In sub-Saharan Africa, wheat imports account for about 85% of supplies, with Russia and Ukraine accounting for a third. But if these countries behave well, they have a chance to get supplies: on Sunday, April 3, number two of the Russian Security Council said that Russia would export to “friendly countries”obviously those who did not accept sanctions against Moscow after the invasion of Ukraine …

Even assuming that the development of the conflict will not have a dramatic impact on this summer’s harvest and that the worst can be avoided, the rise in food prices, added to energy prices, could lead to serious social unrest in the region. world, but also in the Middle East, Central Asia and Latin America.

Fossil fuel peak

The agricultural problem is all the more acute as climate warnings have become more frequent since the beginning of the year: there is talk of drought in France or other European countries such as Portugal, but we must not forget what is raging in Morocco, Madagascar or East Africa, where they say , 20 million people are at risk.

And, faced with the Russian threat, all European countries are flocking to other oil and gas producers to try and secure their supplies. True, we are also talking about the development of wind and solar energy, but at the moment the priority is given to the search for fossil fuels. And everything is fine there: liquefied natural gas from North America, even if it is shale gas produced by hydraulic fracturing, emits much more greenhouse gases than pipeline natural gas, due to the way it is produced and transported, oil produced from the oil sands of Alberta, etc. Oil and gas producers openly laugh.

The Minister of Energy of the United Arab Emirates is ironic about all these people who made manufacturers understand that they “unwanted” when we talked about climate at COP 26 and who now refers to them as “Superhero” which could help them do without Russia. And, of course, he replies that it is not worth counting on.

As for Canadian producers, they are happy to criticize all those who refused to see the realities of energy needs and placed themselves in ever-increasing dependence on countries ruled by dictators.

The balance of greenhouse gas emissions may not be great for a few more years … And at this time, some environmental groups do not find anything better than to attack nuclear energy. It’s called having a sense of priorities.

Arms race resumed

We may also be concerned that many countries are working to drastically increase their military spending, Germany being the most prominent example. If we strictly adhere to geopolitical considerations and the implementation of the principle “if you want peace, prepare for war”, then we can say that these decisions are extremely reasonable. But some may find it even more sensible to spend public money on housing, health care, education, or culture.

The pandemic has in no way slowed down arms sales – from this point of view, the next world is strangely similar to the previous one – and the Ukrainian crisis will revive them.

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One can go on listing all the troubles, big and small, from which the whole world will suffer as a result of the actions of the dictator. And not even the fact that it will serve as a lesson. Do Africans in the Sahelian zone, facing food shortages, know that they are indebted to Putin? Nothing less confident. There is at least one point where the Russian regime has been able to build on the legacy of the Soviet period: the effectiveness of its propaganda.

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