Categories: General Sports News

The economic consequences of the conflict between Russia and Ukraine will come in three different phases

The tension between Russia and Ukraine (and the West) seems to have reached a point of almost no return. In order to alleviate the situation, it would be necessary for one of the two parties to give up, something unlikely after the shipment of Russian troops to Donbass. Now, analysts are beginning to calculate what the economic cost of a conflict between the two countries would be. The consequences would occur in three times with different victims. The financial markets first, the price of raw materials in cash and their derivatives later (product of the impact of the sanctions), and a third part made up of more structural, long-term trends, which would imply from greater defense spending to a new impetus for deglobalization.

The truth is that some of these consequences can already be seen. The tension is fully affecting the financial markets with falls in the stock markets, on the one hand, and rises in gold and raw materials on the other. These movements could be accentuated with the imminent arrival of the sanctions that the European Union and the US are going to begin to implement on the Russian economy.

From the financial institution Berenberg they explain in a note that “A Russian war against Ukraine would be a human tragedy. and is arguably the worst global security threat since the 1962 Cuban Missile Crisis. The potential economic, financial and political impact on Europe could have three stages: very short term, medium term and long term”.

In the very short term, the aforementioned consequences are unleashed for tension and sanctions: risk aversion will occur in the markets in the face of unusual growth in uncertainty. This will come hand in hand with a temporary setback in the confidence of European businesses and consumers, which could subtract some power from the take-off of the economy (after omicron), but in no case generate a recession.

What will the central bank do?

So the sanctions and tension They would cause “an additional increase in energy inflation (but also in economic uncertainty), which could lead the ECB and the BoE to act more cautiously in their March meetings,” these experts say. The discourse of the central banks would revolve around the options they have to reduce the stimuli but they would not take concrete steps towards that withdrawal until the real impact of this conflict is seen more clearly.

Bernd Weidensteiner and Tatha Ghose, economists at Commerzbank, note in a note that right now “in the short to medium term Russia is likely to cope fairly well with Western sanctions, but in the long term they would do considerable damage to its economy. Economies Westerners would also suffer an escalation. the ECB would probably be forced to postpone its change of course despite a further boost in prices”.

Gilles Moec, economist at Axa, believes that “the room for maneuver to adapt to a geopolitical shock with monetary policy seems particularly narrow”. These experts are betting that the ECB will stick to a similar roadmap and end up executing its first rate hike in December. Rising prices will continue to put pressure on Christine Lagarde, while a conflict in Eastern Europe may not be enough of an excuse to stop the hawks.

“Unlike the ECB, the Fed has already practically announced a rate hike for March. Therefore, if the Fed dodges that rate hike due to the conflict in Ukraine, the market could suffer strong distortions,” they say from Commerzbank. So in the most likely scenario, the Fed should continue with its roadmap until at least March. So far the short term that is in the next two months.

Medium term consequences

However, these short-term consequences that are first seen in the markets are the ones that will generate a direct impact on the European economy at a somewhat later stage. (medium term: 3 and 12 months). Bernd Weidensteiner and Tatha Ghose stress that “the problem here is not Europe losing Russia as a client, rather the problem is losing Russia as a supplier. The important point is that Russia is the most important supplier to the EU of some crucial imports, which cannot be replaced quickly or cannot be replaced at all.”

These experts point out that natural gas has been the focus of attention here for a few months. Russia supplies around 45% of the EU’s total natural gas imports, and the EU’s natural gas storage facilities are currently only at 35%. In addition, Russia is also a major supplier of crude oil and coal to According to the EU Commission, Russia accounted for 47% of EU coal imports in 2019 and 27% of crude oil imports Without Russian imports, Europe would see an even higher increase in the cost of According to calculations by Commerzbank, the European Union could ‘survive’ until April (with current reserves) if Moscow completely cut off the flow of gas.

Even if all of the above did not trigger a recession in the euro zone and the EU, gasoline, electricity and other raw materials would most likely reach new all-time highs (prompting inflation broadly in new waves of price increases), which could deepen the discontent that already dominates European consumers who are being victims of one of the biggest cost-of-living crises in recent decades. In spite of everything, in the medium term the stock markets could recover the trend prior to the crisis, according to Berenberg. This would be the only positive news.

long term consequences

According to experts, Moscow could weather the headwinds decently in the short to medium term and Putin could gain some domestic popularity by finding an outside enemy. But in in the long run, Russia would undoubtedly be the big loser (given the impossibility of finding clients like Europe and seeing what happened after the invasion of Crimea), while Europe would undergo some changes that must also be taken into account.

Russia’s economy has done worse than the EU’s since Crimea

“There would be no significant impact on the growth of the EU and the Eurozone. Energy imports would be diversified to allow less dependence on Russian oil and gas, also increasing spending on renewable energynuclear and hydrogen”, say Berenberg.

A relevant change would take place in the arms industry, which would also affect public spending by Western governments. Economists believe that the new geopolitical context would force NATO members to increase their defense spending, reversing the downward trend of recent decades.

The peace dividend is over

“An increase in defense spending is probably unavoidable. The peace dividend has run out. This dividend has allowed the West to reduce defense spending significantly after the end of the Cold War and the collapse of the Soviet Union in 1991. In Germany, for example, defense spending fell from 2.9% of GDP in 1985 to around 1.3% in 2000, a low level at which it has remained for 20 years. Germany and other countries will come under increased pressure to meet the 2% mid-term target for defense spending adopted by NATO in 2014,” Commerzbank said.

Expenditure on defense over GDP

On the other hand, from the German bank they are betting on a more polarized world. Beijing and Moscow are increasingly united, while the EU and the US will do the same with their allies. This division of the globe could also be reflected in the economic policies adopted in the long term: “In the coming years, unfortunately we expect more than ever a deglobalization in the sense that world trade is likely to grow even more slowly than GDP, unlike in the sixty years after World War II.

Regionalization of the economy

Parallel to this deglobalization, there is likely to be a growing trade regionalization (greater relationship between the countries of the same region compared to a decrease in relations with third parties). “Deglobalization and regionalization are, of course, a problem for the German and European economy, which is oriented towards globalization more than almost any other economy,” Commerzbank warns.

On the other hand, economic decoupling between West and East, accelerated by the Ukraine crisis, will bring reconstruction/reindustrialization by the respective economic blocs to meet their demand for themselves. “To ensure this, states will resort to regulation and extensive subsidies.” We are already seeing good examples with the commitment of the US or EU governments to the chip industry. Each block will generate its own technologies, which could reduce the economies of scale and the efficiency of the global economic system.

Finally, this crisis shows that Europe’s energy dependency on Russia is not positive. Having all your eggs in one basket is a big risk. “Therefore, EU countries will push to diversify supply sources, for example in the case of natural gas. If this means greater reliance on liquefied natural gas (LNG), expensive infrastructure will need to be built and expanded. Furthermore, even after the necessary infrastructure has been built, LNG is likely to remain a more expensive solution compared to the Russian pipeline.”

By way of conclusion, Commerzbank analysts believe that the Ukraine crisis makes it clear once again that the coming years will see deglobalisation, more industrial policy, a new EU energy policy and more defense spending. “All this tends to slow economic growth and put pressure on public finances, which are already under pressure”.


Why the Donetsk and Lugansk regions interest Putin: the keys to the conflict in Ukraine

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Chris Lawrence

Chris writes Football and General Sports News on Sportsfinding. He is the newest member in our team, and has a lot of new ideas which he discusses with us to take this portal to new heights. He is a sports maniac, and thus, writing about various sports. He is fond of tattoos.

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