Russia and Ukraine, Europe's worst conflict since the end of World War II in 1945, at least in the short term, shattered hopes of a strong recovery from the pandemic in the global economy.
These effects can be relatively limited or extremely severe. But if energy prices continue to soar, the global economy could easily fall into a second recession in three years.
Michael Every, global strategist at Rabobank, said the combination of a long-standing conflict and tough sanctions could bring "the kind of shock we've experienced during the COVID-19 pandemic," according to the Financial Times.
From an industry perspective, experts warn that Russia's military action against Ukraine could disrupt exports of key commodities and disrupt supply chains, and that disruptions to Russian exports will hit a wide range of industries, from fertilizer makers to food, auto and aircraft manufacturers, and multinationals doing business in the region are gearing up to deal with the impact.
Russia, like Ukraine, is a well-known oil and gas exporter and the world's leading food supplier. These two countries account for nearly a third of global wheat exports. In addition, Russia is an important source of manufacturing metals such as nickel, titanium, palladium and aluminum.
How hard the conflict ultimately hits the global economy will depend on its duration and scope, the severity of Western sanctions, and what Russia does.
This article will elaborate on the impact of the war on various sectors of the economy, how it will affect commodities, inflation, and monetary policy of central banks, and how it will hurt various sectors.
Will energy prices continue to rise?
Russia, Europe's leading supplier of oil and gas, has undoubtedly taken the lead in taking the lead in hitting commodity markets.
Recently, European natural gas futures prices have soared, and the energy industry is facing supply disruptions; oil prices have also broken through $100 per barrel, reaching their highest level since 2014.
Financial pressures from soaring natural gas prices have forced several large metal producers to cut production and shut down smelters.
Russia is the world's third-largest oil producer, producing about 10 million barrels of crude oil per day. Trafigura, one of the world's largest commodities traders, said there had been a discount on Russian crude prices, indicating that buyers' preference for Russian goods had begun to fade.
Investment bank Jeffery said BP and TotalEnergies were the European oil producers that invested the most in Russia. BP owns nearly 20 percent of Rosneft, one of Russia's largest oil producers. Last year, the shares generated more than $2.4 billion in profits for BP and earned $640 million from them.
According to the Financial Times, Jefferies analyst Giacomo Romeo said one possible scenario would be that Ukraine's gas pipelines would be disrupted or that Russia would stop shipping through Ukrainian gas pipelines. Last year, Ukrainian gas accounted for about 8 percent of Russia's total exports to Europe, and about 40 percent of Europe's gas supply depends on Russia.
Because Russia is also a significant source of raw materials for manufacturing, manufacturing companies are bracing for rising costs and potential supply disruptions.
At the same time, Russia is also a major producer of platinum and palladium, two precious metals used to remove toxic emissions from automobile exhaust.
JPMorgan analyst Natasha Kaneva said:
The risk of supply disruption for The Russian Platinum Group is very high, with the country accounting for 12% of global platinum supply and 40% of global palladium supply.
Based in Ukraine, Ferrexpo is the world's third largest exporter of high-quality iron ore pellets. The company said its mining and processing facilities in central Ukraine were still operating normally despite the government's suspension of rail transport. The company's shares plunged 42.5 percent on Thursday, making it the biggest drop in the FTSE 250 index.
U.S. inflation reaches 9%?
Soaring energy costs accounted for more than half of the eurozone's record inflation rate in January. Economists believe that, combined with the impact of oil prices, inflation in the euro area could reach 3% by the end of the year.
According to the Financial Times, Neil Shearing, chief economist at Capital Economics, noted:
Our model shows that in a worst-case scenario, oil prices could rise to $120-140 per barrel.
If this continues into the rest of the year, we see a corresponding increase in gas prices in Europe, which would increase inflation by about 2 percentage points in advanced economies, higher in Europe and lower in the United States. So it's an extra squeeze on real income.
He added that the sanctions-triggered recession in Russia could have other spillover effects. But the eurozone could emerge from recession, and the possibility of an ECB rate hike in December remains.
In the United States, rising gasoline prices and modest financial tightening will weigh on economic growth. The U.S. is likely to ship more natural gas to Europe, raising domestic prices.
Bloomberg analysis pointed out that with oil and gas continuing to flow, the overall CPI inflation rate in the United States may exceed 8% in February and approach 5% by the end of the year, compared with the previous consensus of 3.3%. And an interruption in energy supply could push U.S. inflation to 9 percent in March and remain close to 6 percent until the end of the year.
There is also a view that while the continued rise in oil prices will hit shale oil and gas producers and hurt U.S. energy consumers, overall, the U.S. will be relatively unaffected.
Can financial markets withstand geopolitical shocks?
Hit by geopolitical risks, major global financial markets fell sharply.
Shearing also noted that despite the sell-off in equities, bond yields have fallen and credit spreads have not widened much, suggesting that the market response was orderly and does not yet indicate that the market expects a larger conflict in Europe.
Many emerging economies have suffered more intense shocks. Kevin Daly, portfolio manager at Aberdeen Asset Management, noted a sharp sell-off in equities in countries such as Ghana, Turkey, Egypt and Pakistan as investors fled from financially vulnerable countries to safety, according to the Financial Times.
Randy Kroszner, associate dean of the University of Chicago Booth School of Business and former Fed governor, said the risk of a recession would be reflected in the divergence between investment-grade bond yields and non-investment-grade bond yields, which did not widen widely on Thursday.
He added that sovereign debt yields in countries geographically close to crisis are a good indicator of whether markets are starting to fear a wider conflict.
At the same time, crucial to the global economy is whether households and businesses will noticeably become more cautious in the face of Russia's actions — spending less and saving more.
Ian Shepherdson, chief economist at Pantheon Macroeconomics, said a slowdown in growth is inevitable:
Consumer confidence everywhere will weaken further... This necessarily means that economic growth in Europe, the United States, and most emerging markets will be slower than expected.
Susannah Streeter, senior investment and market analyst at Hargreaves Lansdown, said: "Based on how long this crisis lasts, businesses and consumers could experience a serious loss of confidence. ”
There are also risks that are difficult to quantify, such as cyberattacks in Russia. The New York Fed estimates that attacks on the payment systems of the five most active U.S. banks could spill over to 38 percent of banks' total assets, leading to liquidity hoarding and bankruptcy in the worst-case scenario.
Macroeconomic risks – will the central bank still raise interest rates step by step?
Economists now believe that if the crisis hits global markets hard, it could increase pressure on central banks to raise interest rates.
The worst outcome is a disruption in natural gas supply in Europe, triggering a recession, while U.S. financial conditions will tighten significantly, economic growth will take a bigger hit, the Fed will be significantly more dovish, and the pace of tightening policies will slow.
Krishna Guha, vice chairman of Evercore ISI, said the military operation "complicates the ability of central banks on both sides of the Atlantic to achieve a soft landing in the face of widespread inflation spikes," and he expects financial markets to lower expectations of central bank rate hikes, according to the Financial Times.
Still, the Fed is likely to look beyond temporary price shocks and continue with its plans to start raising rates in March, though it may not raise rates by as much as 50 basis points.
Cleveland Fed President Mester said Thursday:
Barring an unexpected turnaround in the economy, I think it's appropriate to raise the federal funds rate in March and raise rates further in the coming months.
In the face of sanctions from the United States and Europe, Russia could retaliate by cutting off gas supplies to Europe.
The ECB estimates that a 10% gas supply shock could reduce eurozone GDP by 0.7%. If this proportion is expanded to 40%, it means that the European economy will shrink by 3%. That could cause the ECB to cancel rate hikes this year.
Other countries, such as Saudi Arabia and other Gulf oil exporters, may benefit. But for most emerging markets that are already experiencing a slow recovery, rising prices and capital outflows could be a major blow and exacerbate the risk of a post-pandemic debt crisis. Turkey is an extreme example: as a major energy importer, Turkey's currency had depreciated sharply before the Ukraine crisis, and inflation was soaring.
Is the industry capable of withstanding this "unprecedented chaos"?
From the perspective of the semiconductor industry, Russia and Ukraine are the main sources of the chemical gases C4F6 and neon, which are crucial in semiconductor production.
If supply in Ukraine is severely hampered for a long time, chipmakers could be one of the most affected industries. Ukraine is one of the largest suppliers of rare gases used in chip manufacturing, especially neon gas for chips.
According to the Financial Times, Richard Betzendahl, an independent adviser who specializes in rare gases, said That Ukraine produces a quarter of the global total of neon gas. He added that the undersupply of xenon and krypton, which are vital to semiconductor manufacturing, will also be exacerbated.
After the imposition of sanctions by the European Union and the United States, the crisis will undoubtedly also hit the Russian banking sector hard.
Shares of Austrian bank Raiffeisen fell 20 percent on Thursday, and more than a third of the bank's profits came from Russia. Shares of Credit Union and Societe Generale both fell more than 11 percent.
Rosbank, a Moscow-based subsidiary of Societe Generale, has 550 branches and 3.1 million customers, while Unicredit Has 103 branches and 2 million customers in Russia.
According to JPMorgan Chase, Russia accounted for 6 percent of UFRu's profits last year and 4 percent of Societe Generale's profits. In terms of total assets, Raiffeisen, Societe Generale and Résidence d'Italia are the 9th, 10th and 11th largest banks in Russia, respectively.
All three banks said they were closely monitoring developments, but insisted their operations in Russia were well capitalized enough to handle large-scale withdrawals from customers and said they would continue to operate in a "fully compliant manner."
In addition, the service industry is facing unprecedented chaos.
Law firms and consultancies with offices in Russia are developing contingency plans to deal with Moscow's possible "retaliation" against Western sanctions.
McKinsey & Company and The Boston Consulting Group each have more than 400 employees in Moscow, while Magic Circle, britain's five commercial law firms, have more than 150 lawyers in Russia.
Large international law firms in Ukraine, including CMS, Dentons and Baker McKenzie, temporarily closed their offices in Ukraine on Thursday morning and have been helping to move employees to EU bases.
Dentons said it would transfer Ukrainian lawyers to other offices if requested.
Accounting and consulting firm PwC, which has three offices in Ukraine, said it was working to keep its business running "as normally as possible," but advised its 750 employees in Ukraine to stay home on Thursday. Accounting firm KPMG said the company was "still committed to maintaining its business locally". KPMG has 4,000 employees in Russia and 600 in Ukraine.
A person from a consulting firm said: "Getting people to leave is absolutely unprecedented chaos. ”
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