CARACAS, March 2 — The war in Ukraine will not only affect global economic growth, postpone overcoming the COVID-19 pandemic, and increase already high inflation pressures. Regions like Latin America may be affected by a lower flow of investments and remittances, while some producers of oil, gas, cereals, minerals may experience a rebound in their exports.
The World Bank and the International Monetary Fund have yet to announced how the conflict will affect the projected growth of the global economy and countries or regions in particular. But both institutions announced late yesterday that they are working to attend Ukraine’s emergency financing request for funding as the European nation faces an escalation of the Russian invasion.
The Center for Economic and Business Research, at Western Washington University, projects that inflation in the main Western economies could reach as high as almost 10%, double what it is currently in Europe and 3 percentage points above the U.S.. Russia has a significant financial cushion in gold and foreign currency, which would give it oxygen if the armed confrontation is prolonged and an agreement is not reached during the dialogue to be held this week on the border of Belarus and Ukraine between the two warring countries: although it has a relatively small economy, it has the fourth largest foreign reserves in the world, USD630 billion, according to the IMF. But much of that was already affected by sanctions imposed over the weekend by the European Union, the U.S. and other Western democracies
The rise of oil prices may favor Colombia and other Latin American countries that export oil and gas, such as Brazil, Mexico, Ecuador and Guyana. “For each additional Brent dollar, Colombia’s economy could receive between 350 billion pesos and 400 billion pesos, which would mean that the hydrocarbon sector would contribute some 30 trillion pesos during 2022. In addition, oil exports could reach 18,000 million dollars”, Semana, a Bogota-based magazine reported on its website.
The negative impact would come from the other side. The Minister of Finance, José Manuel Restrepo, pointed out that most of the agricultural inputs used by the country for the care of its crops come from Russia, so the costs of fertilizers and pesticides could double or triple and this would have an inflationary impact on its food basket. Some trade flows could also be affected, such as coffee and flower exports from Colombia to Russia.
Flower exports represent “a market that is not yet very large, but it is an important market for the world of producers. This is slowing down at the moment,” economist Cecilia López Montaño told RFI.
Cereals and Minerals
Due to their high grain production capacity, Argentina and Chile could increase their exports to supply the demand that the Russia and Ukraine wont be able to serve. “Both trade sanctions and these possible supply bottlenecks put upward pressure on international commodity prices, benefiting the countries that also produce and export them,” said Juan Manuel Garzón, economist at Ieral-Fundación Mediterránea, in Cordoba, Argentina.
On the other hand, Russia and Ukraine are major exporters of metals such as copper, aluminum and nickel. “These metals are used to manufacture semiconductors, which have already suffered from a bottleneck in their production due to the COVID-19 pandemic. Bottlenecks for products that use semiconductors, such as vehicles, computers, cell phones and other electronic devices, will be aggravated by the shortage of inputs to manufacture these chips,” José Roberto Balmori, director of the School of Economics and Business at the Universidad Anáhuac de México, explained to Forbes.
The case of Venezuela
The financial and economic sanctions imposed on Russia, most notably the disconnection of Russian banks from the international financial intermediation system SWIFT, will also affect the government of Nicolás Maduro and the oil trading network they designed to evade sanctions targeting Venezuela in recent years for human rights violations, money laundering and corruption.
“Venezuela is going to start feeling that pressure, Nicaragua is going to feel that pressure, as is Cuba,” said Juan S. Gonzalez, Biden’s special assistant for Latin America and the U.S. National Security Council’s senior director for the Western Hemisphere, in a Voice of America tweet.
The sanctions imposed by the West on Russia are unprecedented: they include even the freezing of assets outside the country of the four main Russian banks, an export veto for high-tech products in the areas of semiconductors, aerospace and naval, and limitations to trade in the currencies of countries that are adhering to such sanctions.
“Sanctions on Russia could make things difficult for Venezuela,” said Manuel Sutherland, an economist in Caracas. The two countries have about 20 military agreements and Russia exports weapons, equipment and minor goods to Venezuela, which could decrease under the war scenario.
At the same time, the sanctions could affect the logistic and commercial network that allowed the government of Maduro to continue exporting Venezuelan oil in recent years using its political allies to evade U.S. sanctions against PDVSA, among them China and Russia. And if Venezuela’s exposure is very high in the sanctioned Russian banks and its deposits in the former Soviet capital were in rubles, with the significant devaluation of the Russian currency, there is also a significant loss of capital there.
“Putin and Maduro have been under an alliance for quite some time. There are agreements between the two countries, from oil production to visits by Russian tourists to different parts of the country. These are the alliances that we know about, but there may be others that we are unaware of” that may also be impacted, says Caracas-based economist Ronald Balza at Universidad Central de Venezuela.
Spain and U.S.
In Spain, they estimate that the conflict in Ukraine could raise inflation in the Iberian nation by up to 2 percentage points this year and that the growth of its gross domestic product would be “significantly lower” than the 5.6% projected for this year. In addition, analysts quoted by La Vanguardia expect lower exports to the countries most affected by the consequences of the attack or the economic sanctions imposed on Russia and by the breakdown of confidence in the recovery
“Higher inflation would erode the purchasing power of households and would therefore reduce the recovery of private consumption, with a very important impact on growth”, concludes the research department of CECA, one of Spain’s banking association. The 42.2% of the cereals that Spain currently imports come from Ukraine, so it is also possible to anticipate some shortage in that market or a significant price increase or a combination of both factors.
In assessing the global implications, The New York Times, stressed that an open and prolonged attack by Russian troops could cause soaring energy and food prices, as well as fuel inflationary fears and scare investors, a combination that threatens investment and growth in economies around the world. The biggest damage this could do to the U.S., they believe, may come from higher oil, oil products and gas.
“We will see significant increases in gasoline and diesel. To counteract this effect, the United States will be offering part of its strategic gasoline reserves”, Balmori said.
If the effects were very adverse, the immediate impact would be nothing like the devastating suspensions of activities caused by the coronavirus in 2020. “Russia is a transcontinental giant with 146 million people and a huge nuclear arsenal, plus it is a key supplier of oil, gas and raw materials that keep the world’s factories running. But unlike China, which is a manufacturing powerhouse and intertwined in intricate supply chains, Russia plays a minor role in the global economy. Italy, with half the population and fewer natural resources, has an economy twice the size. Poland exports more goods to the European Union than Russia,” the NYT concluded.
____________
Relevant stories:
* Sanctions increase chance of Russia international debt default, J.P.Morgan says: Reuters
*IMF, World Bank Working on Ukraine’s Emergency Financing as Russia Bombards Civilian Areas
* With Ukraine Under Siege, U.S. Imposes ‘Unprecedented, Expansive’ Sanctions Against Russia
______________
For comments, visit our Live Chat or reach out the journalists of this story:
Journalist
Marianela Palacios Ramsbott
Email: nelapalaciosr@gmail.com
Phone:+58 414-5469228
Editor:
Jose Enrique Arrioja
New York
Email: jearrioja@zignox.com
+1-917-239-1795