6 Mar, 2022
Western sanctions threaten to worsen the supply chain, inflation and
debt crises already threatening a vulnerable world economy. An obsession
with punishing Russia could end up punishing us all
Things have
been getting very hot on the war front with Russia’s invasion of
Ukraine, Vladimir Putin’s hints about the nuclear option, Germany’s
swing towards rearmament and even talk in Japan about nuclear weapons.
All this has so far masked the growing danger of crises on the global
economic front.
For the embattled leaders of Russia,
China and the US, among others, these events are a distraction from
having to deal with galloping inflation, soaring debt levels, rising
interest rates and fiscal problems (not to mention Covid-19 and climate
change).
The distraction will be temporary, however,
because even if the Ukraine invasion stops short of becoming a full-out
hot or cold war, the damage and mess accumulating in the global economy
will engulf all players on the world stage.
It’s a sad
reflection of the human condition and the lack of statesmanship that the
world has shifted onto a war footing just when so many potential
economic crises are looming. Unlike missiles raining from the sky, these
threats will undermine economic foundations from below.
The biggest immediate threat is inflation and events are fuelling the fires.
Economic
sanctions are being hurled at Russia with impunity or even a kind of
malicious glee. They have become the weapon of choice rather than
boots-on-the-ground military intervention.
How international sanctions imposed since Ukraine invasion are hitting Russia
Sanctions
further damage supply chains already disrupted by trade wars, and they
fuel inflation, especially for oil and gas prices – just what the world
does not need. Oil prices, as analyst Jeffrey Halley at foreign exchange
specialist Oanda said, were “on fire over Russian supply shocks”.
As
Halley noted, there is a “slowly dawning reality that the world outside
of Russia will also endure economic pain” in the aftermath of Russia’s
invasion of Ukraine and the barrage of economic sanctions it has
provoked.
International Monetary Fund managing director
Kristalina Georgieva and World Bank Group president David Malpass
declared in a joint statement: “Commodity prices are being driven higher
and risk further fuelling inflation, which hits the poor the hardest …
The sanctions announced over the last few days will also have a
significant economic impact.”
That risk is very high. Supply
chain disruptions caused by Donald Trump’s trade wars against China set
inflation in motion, and it has since gone from a canter to a gallop.
Inflation feeds on itself by creating inflation expectations, then
pressure on price rises and higher wages.
Oil prices are almost
certain to continue rising, along with metal and food prices. The
critical question is how central banks will react. The US Federal
Reserve, for one, does not appear willing to hold off on raising
interest rates – so look for further collateral damage.
Global
financial conditions, as the IMF noted, “are set to deteriorate as
central banks in advanced economies tighten policy to fight unexpectedly
persistent inflation pressure”. Or as Georgieva and Malpass said:
“Disruptions in financial markets will continue to worsen should the
conflict persist.”
This is where the rush to apply
sanctions will become really interesting. Once the impact of sanctions
on market sentiment begins to manifest itself – in other words, once the
“supply chain” of investment to stock markets is affected – the
double-edged sword impact of sanctions will begin to sink in
This is
not the end of the story, unfortunately. There is another monster
lurking beyond the horror of a hot war, the threat of a lasting cold
war, the sanctions war and the spectre of rapidly accelerating (maybe
even runaway) inflation – and that is the beast of global debt.
In an
unusually frank discussion in the IMF’s Finance and Development
publication, World Bank chief economist Carmen Reinhart and IMF director
of strategy, policy and review Ceyla Pazarbasioglu revealed just how
close the world may be to entering another debt crisis.
Their
analysis deals with emerging market and developing country debt, where
the surge has been greatest in recent times and, chillingly, they note
that “economies are entering perilous waters that evoke memories of past
debt defaults”.
Used cars cost more than a luxury flat as economic crisis and inflation hit Sri Lanka
Many
emerging market and developing economies “have encountered crises at
lower debt levels” than those now, they said, adding that: “Tighter
monetary policies in advanced economies are poised to push up
international interest rates, which tends to put pressure on currencies
and heighten the odds of default.”
Heavy debt burdens are
by no means limited to emerging markets. The sensitivity of the
household, corporate and government sectors in advanced economies is
also such that prospective (and almost certain) rises in interest rates
could threaten debt crises too.
Much of the surge in government debt
is due to fiscal stimulus designed to avert a Covid-19 economic
recession but, as the IMF noted in a recent blog, “now, the bill is
coming due. Governments face the tricky task of reducing unprecedented
debt.”
The world is obsessed with the Ukraine situation and a desire
to punish Russia with economic sanctions. But sanctions in themselves
can be weapons of mass destruction in causing a fallout in global
economic activity. When you take a wrecking ball to a task, remember
that the ball can also swing back and hit home.
Anthony Rowley is a veteran journalist specialising in Asian economic and financial affairs