The Ukraine Crisis: Rising Tensions Increase Economic Risks --- Sanctions on Russia compound the strain on world-wide supply chain hobbled by Covid

"The global economy has one more disruption to deal with.

Russia's decision to deploy troops to two breakaway Ukrainian provinces and heightened aggression and retaliatory sanctions by the West ratchets up the risks to a global economy reeling from snarled supply chains and some of the highest inflation in years.

The price of oil surged, with the global benchmark closing in briefly on $100 a barrel, though it retreated somewhat by early European afternoon trading. Other big Russian and Ukrainian exports -- such as natural gas, wheat, aluminum and nickel -- also rose. Big businesses with operations in Russia, or dependent on raw materials from the country, have said they are bracing for disruptions.

The brunt of any economic pressure is likely to be borne by Europe, which depends heavily on Russian energy, and whose banks and companies could be caught up in sanctions. Those measures, while aimed at Russian entities, could raise a host of new supply-line problems for Western companies, including making it more difficult to finance purchases of commodities or send in parts to their Russia operations.

Renault SA Chief Executive Luca de Meo told analysts Friday that a worsening of the tensions between Russia and Ukraine could lead "to another supply-chain crisis linked to parts that would have to come from abroad."

The conflict has resulted in higher regional-transport costs. Oleg Solodukhov, a partner at Kyiv-based shipping consulting firm the Charterers, said the crisis has added $3 to $5 a metric ton to freight costs from Black Sea ports. That includes an insurance premium of up to 50 cents a metric ton on voyage charters, he said.

The crisis in Ukraine complicates the tricky calculus of major central banks as they prepare to phase out pandemic stimulus policies amid a surge in inflation. Both the Federal Reserve and European Central Bank are likely to tread more cautiously at policy meetings next month where they had been expected to outline bold plans to phase out easy money.

The conflict isn't likely to change the Fed's calculus about whether to raise interest rates at its March 15-16 meeting. But the economic uncertainty from such a conflict is likely to weaken the case for the Fed to raise rates by a larger half-percentage-point.

For the ECB, conflict in Ukraine makes it unlikely that the bank will accelerate an expected shift toward interest-rate increases, given the probable negative impact on growth and confidence, said Isabel Schnabel, who sits on the ECB's executive board, in an interview with the Financial Times last week.

Investors have started to dial back their bets on when the ECB will start to raise interest rates, according to money market data.

Some economists say the worst-case scenario could be a 1970s-style crisis, in which supplies of natural gas, oil and other raw materials are hampered when demand from economies emerging from pandemic lockdowns is soaring.

Russia and Ukraine together account for a tiny share of global economic output and don't represent significant export markets for Europe or the U.S. But as prices for oil, gas and other commodities such as wheat already are fueling a global surge in inflation, any loss of supply from Russia and Ukraine could push prices even higher and weaken economic output, particularly in Europe.

The U.K.'s National Institute for Economic and Social Research has made some calculations based on an increase in tensions to the point that sanctions are placed on Russia's energy exports or Russia itself cuts gas exports in retaliation against other sanctions. Such interruptions would lower global economic growth this year by just short of 1 percentage point, to 3.3%.

For the eurozone, the impact would be greater, with annual growth slowing to 2.1% compared with 3.8% without higher prices and the reduced investment by businesses that the NIESR expects the threat of war would bring.

"The broad implications . . . are somewhat reminiscent of the 1970s energy crisis," the NIESR said. "Higher prices and supply limitations severely disrupted economic activity in the global economy and led to higher inflation."

According to the EU's statistics agency, the bloc relied on Russia for 47% of its imports of gas in the first six months of 2021, more than twice as much as the 21% it bought from its next-largest supplier, Norway. During the period, Russia accounted for almost a quarter of the EU's oil imports, followed again by Norway with a 9.1% share.

"Substantial reductions in Russian gas deliveries to Europe would be hard to replace in the near term," wrote Jeffrey J. Schott, a senior fellow working on international-trade policy and economic sanctions at the Peterson Institute for International Economics, in a report on possible sanctions.

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Tom Fairless in Frankfurt, Benoit Faucon in London and Nick Kostov in Paris contributed to this article.

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Conflict Will Hurt

Commodity Supply

Russia is an important producer of copper and aluminum. Any difficulties getting those commodities to customers world-wide would cause fresh disruptions to strained supply chains.

Struggling to overcome a shortage of semiconductors, the automobile industry could face additional problems if Russia's supply of palladium were to slow. The metal is used in catalytic converters. Russia's MC Norilsk Nickel PJSC is the largest producer globally, accounting for between 25% and 30% of total output.

Along with Ukraine, Russia is a big producer of wheat, as well as key ingredients for fertilizers such as urea and potash. Reductions in the supply of these items likely would push food prices higher. The two nations combined account for 29% of global wheat exports, says data from the U.S. Agriculture Department.

The nearby Black Sea serves as a major conduit for international grain shipments, and Ukraine is also among the top exporters of barley, corn and rapeseed. Egypt and other countries in the Middle East and North Africa are heavily reliant on Russian and Ukrainian grains." [1]

 

 There is no fear of sanctions in Lithuania. Only the wishes of Landsbergis' grandson are important here. If he needs money, the wife gives, paying less to her teachers and educators. And that's it. Learn to live.

 

1. The Ukraine Crisis: Rising Tensions Increase Economic Risks --- Sanctions on Russia compound the strain on world-wide supply chain hobbled by Covid
Hannon, Paul. Wall Street Journal, Eastern edition; New York, N.Y. [New York, N.Y]. 23 Feb 2022: A.8.