How Sanctions Against Russia Affect the Global Economy?

In the span of just a few days, the global economic outlook has darkened as troops battled in Ukraine and unexpectedly strong financial sanctions rocked the Russian economy and threatened to fuel global inflation further.

The price of oil, natural gas and other staples spiked on Monday. At the same time, the groaning weight on supply chains, still working on the pandemic, increased as the United States, Europe and their allies tightened Russia’s financial transactions and froze hundreds of billions of dollars of central bank assets abroad.

Russia has long been a relatively minor player in the global economy, accounting for only 1.7 percent of total world output, despite its massive energy exports. President Vladimir V. Putin has taken steps in recent years to further isolate it, build a repository of foreign exchange reserves, reduce national debt and even ban imports of cheese and other foods from Europe.

But while Mr Putin has ignored a set of international standards, he cannot ignore a modern and massive financial system largely controlled by governments and bankers outside his country. He has mobilized tens of thousands of his troops and in response, Allied governments have mobilized their vast financial power.

Now, “it’s a gamble between a financial clock and a military clock, to evaporate the resources to wage a war,” said Julia Friedlander, director of the state economic initiative at the Atlantic Council.

Together, the invasion and sanctions are adding a huge dose of uncertainty and volatility to economic decision-making, increasing the risk to the global outlook.

The sanctions were intended to prevent the disruption of essential energy exports, on which Europe mainly depends for heating homes, power plants and filling gas tanks. That helped to dampen, but not wipe out, war-induced rises in energy prices and concerns about disruptions in the flow of oil and gas.

Concerns about shortages also pushed up the price of some grains and metals, which would entail higher costs for consumers and businesses. Russia and Ukraine are also major exporters of wheat and corn, as well as essential metals, such as palladium, aluminum and nickel, which are used in everything from cell phones to cars.

It is also expected that the already dazzling transport costs will increase.

“We’re going to skyrocket rates for sea and air,” said Glenn Koepke, general manager of network collaboration at FourKites, a supply chain consultancy based in Chicago. He warned that ocean rates could double or triple to $30,000 per container from $10,000 per container, and air freight costs are expected to rise even higher.

Russia closed its airspace to 36 countries, meaning shipping planes will have to divert to roundabout routes, spending more on fuel and potentially encouraging them to reduce the size of their payloads.

“We’re also going to see more product shortages,” said Mr. Koepke. While the season is slower now, he said, “companies are ramping up summer volume, and that will have a big impact on our supply chain.”

In a flurry of updates Monday, several Wall Street analysts and economists admitted that they had underestimated the magnitude of Russia’s invasion of Ukraine and the international response. With events piling up fast, assessments of the potential economic impact have ranged from mild to severe.

Inflation was already a concern and in the United States was at its highest point since the 1980s. Now questions about how much more inflation could rise — and how the Federal Reserve and other central banks are responding — hovered over each scenario.

“The Fed is in a box, inflation is at 7.5 percent, but they know that if they raise interest rates it will blow up the markets,” said Desmond Lachman, a senior fellow at the American Enterprise Institute. “The policy choices are not good, so I don’t see how this has a happy outcome.”

Others were more cautious about spillovers given the isolation of the Russian economy.

Adam Posen, president of the Peterson Institute for International Economics, said there are thorny questions, especially in Europe, about what the conflict would mean for inflation — and whether it could hold up to the prospect of stagflation, in which economic growth slows and prices are expected to rise rapidly.

But overall, he said, “the damage is probably small.”

That doesn’t mean there won’t be intense pain in spots. Mr Posen noted that a handful of banks in Europe could suffer from their exposure to the Russian financial system, and Eastern European companies could lose access to money in the country.

Thousands of people fleeing Ukraine are also pouring into neighboring countries such as Poland, Moldova and Romania, which could increase their costs.

Turkey’s economy, which is already struggling, is likely to take a hit. Oxford Economics lowered its forecast for Turkey’s annual growth rate by 0.4 percentage points to 2.1 percent due to increases in energy prices, financial market disruptions and declines in tourism.

In 2021, 19 percent of visitors came from Russia and 8.3 percent from Ukraine. Inflation, which has stood at nearly 50 percent in two decades, is now estimated at 60 percent, Oxford said.

In the United States, the chairman of the Biden Administration’s Council of Economic Advisers, Cecilia Rouse, said the biggest impact on the US economy from the war was rising gas prices. “This has definitely clouded the outlook,” she said at a forum in Washington.

Gasoline prices are about a dollar higher than a year ago, with a national average of $3.61 per gallon, according to AAA.

Rising energy prices are hard on consumers, though good for producers — and the US economy has both.

Other oil-producing countries will also see an increase in revenues. And for Iran, which has been locked out of the global economy for years, demand for oil from other sources could help keep negotiations on the lifting of sanctions running smoothly.

In the longer term, the current conflict is likely to affect the future fiscal decisions of several countries. German Chancellor Olaf Scholz announced he would increase military spending to 2 percent of economic output.

“Defense spending has consistently declined in the world after World War II,” Deutsche Bank president Jim Reid wrote in a note Monday. Now, with this shift in “the geopolitical tectonic plates,” he said, priorities are changing, and “those levels are likely to rise.”

In Russia, the central bank and government have taken a series of measures, including doubling key interest rates to 20 percent to increase the ruble’s appeal, banning people from transferring money to foreign accounts, and closing the stock market. to contain and address the damage. panic.

“What’s happening right now is we’re looking at the disintegration of one of the largest economies in the world,” said Carl Weinberg, chief economist at High Frequency Economics. “And as far as I know about tactics, this is a dangerous tactic.”

Peter S. Goodman and Jeanna Smialek reporting contributed.