As the world economy is recovering from the Covid 19 pandemic a global crisis looms from Eastern Europe with tensions rapidly rising in Ukraine. On Monday night the Russian President Vladmir Putin announced his recognition of the independence of two separatists’ regions of Ukraine, Donetsk and Luhansk. This announcement was received by major powers as confirmation of Russian invasion of Ukraine which had been marred with suspicion and allegations for some months.
The European Union and the United States have responded with sanctions targeted at Russia, Joe Biden the United States President in a brief address on Tuesday afternoon announced a set of sanctions targeting Russian banks and promised to escalate sanctions if Russia continues its move into Ukraine.
On Wednesday the United Nations Secretary General AntonioGuterres said if the Ukraine conflict is escalated into all-out war “the world could see a scale and severity of need unseen for many years”.
Here is what events in Ukraine mean for the world economy.
Oil and Gas
Russia is the world’s third biggest producer of oil behind the U.S.A and Saudi Arabia according to www.worldometers.info The U.S.A produces 14.83 million barrels per day and consumes 19.68 million barrels per day, Saudi Arabia produces 12.42 million barrels per day and consumes 3.30 million barrels per day followed by Russia with a production of 11.27 million barrels per day and consumption of 3.63 million barrels per day.
It is therefore inevitable that events in Ukraine involving Russia have caused a global scare of the oil supply chain disruption resulting in soaring oil prices, brent crude was atUS$96.33 on Wednesday 22:15 CAT after experience a significant 4% rise since the escalation of the Ukraine Crisis.
South Africa is economically anxious as the country was already facing a fuel increase prior to the crisis, the same is expected to hit other Sub-Saharan African countries. While announcing sanctions on Russia Joe Biden acknowledged the impact this would have on Americans at the gas pump but vowed to minimise the pain. In Asia, China is expected to benefit significantly from a possible diversion of Russian oil from U.S.A and Europe towards Asia, China has a huge oil shortfall with their production at 7.5 million barrels per day and consumption at 12.79 million barrels per day.
Both Russia and Ukraine are major producers and exporters of wheat to Africa, Middle East and Europe they export 25.4% of the World’s wheat. A food crisis is therefore expected if the crisis escalates which may lead to unrests across the world with rising bread prices.
As a response to the possible Russian Invasion of Ukraine Germany halted the certification of the Nord Stream 2 pipeline whose purpose is to move gas directly from Russia to Germany. While this has financial ramifications for Russia it will also cause chaos in Europe which is already troubled by high gas prices. The halting of the pipeline may seem to punish Russia for now but will haunt Europe in the long term if not sooner than perceived, bearing in mind that Russia supplies about 30% of Europe’s natural gas.
Russia is a major producer of palladium which is used in smartphones, cars and dental fillings. The sanctioning of Russia and Russian banks will put a strain on the global supply of the precious metal and may result in price increases and severe shortages.
Gold producing countries may benefit from fast increasing gold prices as tensions between Russia and the West over Ukraine have created a demand for haven assets such as gold. The rise in Russian risk premium has pushed the gold prices to US$1904.30 as of Wednesday 22:55 CAT. It can be argued that Russia stands to benefit from this as they are currently the world’s third largest producer of gold at 281.5 tonnes just after China and Australia with the U.S.A fourth placed. In Africa South Africa is expected to be the biggest beneficiary of rising gold prices as they are currently fifth placed at 123.5 tonnes. While the rise may be exciting if the crisis deescalates the gold price will fall rapidly thus great caution has to be exercised.
As of Wednesday, equities saw a great fall while the US$ gained after the announcement of sanctions against Russia. With tensions rising investors seem to be losing their appetite for risk. There was a rise on Wednesday morning, but losses deepened for the better part of the day. Trading remains volatile amidst uncertainty and speculation.
While anxiety grips the world because of the ongoing Ukraine crisis there are fears that the world may slide into inflation and all the recovery made from the Covid 19 pandemic may suffer a huge blow.
Kundai Vambe is Political Researcher and Member of the Global Alliance for Justice Education.