The Russian war in Ukraine has become the biggest economic challenge of President Biden’s tenure and threatens to push the world into a recession that could jeopardize an already fragile American recovery.
The combination of punitive sanctions, which Biden and his allies are calling for, and Russia’s retaliatory measures have spread across global food and energy markets, exacerbating already high inflation and undermining global growth. An oil shock caused by the invasion pushed average gasoline prices nationally above $5 a gallon in June before falling steadily in July and August.
This week, the European Union is expected to finalize a plan that would try to limit further economic damage by capping the price Russia can earn from the sale of a barrel of exported oil. The untested idea, developed by Mr Biden’s finance minister, aims to keep Russian oil flowing to the world market even as Europe plows through with new restrictions on Moscow’s oil sales.
In the coming year, that price cap and other efforts to manage the global fallout from the war should be Mr Biden’s main economic focus. With few legislative options available after his party lost control of the House, Biden will have to find ways to protect US markets from the effects of the war, including new international initiatives to bolster food supplies and a potentially escalating financial crisis in developing countries to avert. .
Mr. Biden and his economic team spent much of this month’s Group of 20 countries summit in Bali, Indonesia, laying the groundwork for those efforts. They negotiated with rich countries on the best ways to ramp up global food production to replace lost crops in Ukraine, hoping to alleviate food shortages that have hit low-income countries in particular. And they sought to move forward with a system to more easily bail out highly indebted, low-income countries — such as Sri Lanka and Chad — that are facing fiscal crises as war-inflamed price increases prompt central banks to raise interest rates and , with them, financing costs.
But Mr Biden’s biggest economic decisions in the coming months will be related to the war: how best to support Ukraine’s resistance to the Russian invasion and how to push aggressively for an end to the fighting.
The war has been a humanitarian crisis for Ukraine, but “it has also been extremely costly for the world,” said Gita Gopinath, the first deputy director of the International Monetary Fund, who took part in the meetings of the Group of 20. We are already in quite a difficult situation, even without a dramatic escalation.”
Ms. Gopinath said that during the summit “there was a common refrain from everyone: the war must end because the impact on the economy is very great.”
Government officials agree that the best way to strengthen the global economy in the coming months would be to hasten the end of the war — which Biden has repeatedly said must come on Ukraine’s terms.
In the meantime, government officials say the centerpiece of their efforts to minimize economic damage is a plan to impose an oil price cap — at a level European officials are still negotiating — on Russian exports. Mr Biden pushed the idea through months of transcontinental negotiations. The aim is to ensure that millions of barrels of Russian oil continue to flow to the world market even as European sanctions come into effect – while capturing a reduction in the revenue Moscow needs to continue its war effort.
On Monday, John Kirby, the National Security Council’s strategic communications coordinator, told reporters that what has a “very acute, significant global impact on the economy is the war in Ukraine. And that is why we are trying to pursue a price cap for Russian oil.”
The plan is essentially a way to avoid a potentially catastrophic global oil shock that Mr Biden might otherwise have helped trigger this year when he encouraged Europe to follow America’s lead and ban imports of Russian oil . Government officials are confident the cap will do just that, keep oil on the market, even as the high level of the price cap will limit its grip on Russian revenues.
“It’s safe to say we’re optimistic that a successful price cap will prevent a major energy price shock,” Ben Harris, the Treasury Department’s assistant secretary for economic policy, said in an interview. He added: “This is a case of pre-planning to avoid a crisis.”
The president has few domestic options if those plans fail. Because his party lost control of the House, Biden will almost certainly be limited in his ability to push new economic measures through Congress over the next two years.
The International Monetary Fund and the Organization for Economic Co-operation and Development (Organization for Economic Co-operation and Development) have downgraded their forecasts for global growth next year, citing the lingering fallout from the Russian invasion.
The war, the leaders of the Group of 20 Nations said in a statement at the end of their Bali summit, “is causing immense human suffering and exacerbating existing vulnerabilities in the global economy – inhibiting growth, increasing inflation, disrupting supply chains, increases food insecurity and increasing financial stability risks.”
Mr. Biden cannot end the war single-handedly. But he can try to minimize the economic pain.
That starts with the price ceiling. A European Union import ban on Russian oil will take effect next month. Those sanctions could knock millions of barrels of Russian oil off world markets and drive up the price of crude oil.
The price cap seeks to defuse that possibility with a new but untried plan to allow Russia to continue selling oil on the world market, but at a discount. That would reduce the oil revenues Moscow uses to help fund the war. It would also keep oil prices more stable and avoid what some forecasters say could be as much as $7 per gallon of gasoline in the United States. And it would relieve pressure on developing countries struggling economically, by potentially allowing them to buy Russian oil at a sharp discount to market prices.
Oil futures traders appear to share the government’s confidence that the plan will work: they have not priced in any market disruptions in the coming months.
Russia could still retaliate against the plan and take oil off the market, raising prices again but also cutting off revenue to Moscow. It may also pose economic risks to the world by escalating the war.
Moscow has recently stepped up its rocket attacks against Ukrainian targets, including civilians. A seemingly accidental explosion of a Ukrainian missile in Poland has reminded the world of the risks of an escalation of conflict that could spill beyond Ukraine, into Europe and beyond. Biden has so far managed to avoid escalation by preventing the conflict from directly affecting NATO allies such as Poland. More stray missiles — or provocations by Moscow — could challenge that calculation.
Mr. Biden insists that the US economy, with a labor market that continues to add jobs at a rapid pace, is well positioned to weather any further impacts the invasion may have on the global economy. His aides note that the United States, as a major energy producer, is not suffering from a lack of access to Russian oil or natural gas like Europe.
He has so far faced little domestic political pressure for his decisions in Ukraine. While the war has filled news outlets and taken up much of Mr Biden’s time, including frequent speeches, it has not yet become an electoral wedge. According to data from AdImpact, Ukraine fell short of the list of the top 60 topics of campaign advertising across the country during the midterm election cycle.
But should Biden seek re-election, the economics of the war could play a major role. It could drive up gas prices, which tends to affect the public’s view of the president. Stubbornly high food and energy inflation could push the Federal Reserve to raise interest rates faster and for longer than officials currently predict. That would curb growth and increase the likelihood of a recession.
Mr Biden has repeatedly said those threats would not stop him from doing what he believed was right in Ukraine. Asked at a press conference in Spain this summer how long Americans would have to pay higher gas prices as a result of the war, Mr Biden was blunt. “As long as it takes,” he said, “so that Russia cannot, in fact, beat Ukraine and go beyond Ukraine. This is a critical, critical position for the world. Here we are.”
At a press conference in Bali this month — after both surprising success in the midterm elections and several days in which economic issues took center stage in talks with foreign leaders — Mr Biden did not specify any updates on how long that process of beating Russia could take. , and what toll it could take on the economy.
He answered only five questions, none on economic issues.
Alan Reportport reporting contributed.
