Global economy trapped in chaos
Last month, the world was rocked by another unprecedented event that sent shockwaves throughout the globe and placed major nations on the brink of another world war. Despite being predicted for the past many days, the Russian invasion of Ukraine came as a surprise for everyone. Developed western nations rushed to slap sanctions on Russia and exclude it from SWIFT system
The Society for Worldwide Interbank Financial Telecommunication (SWIFT), legally SWIFT, provides services related to the execution of financial transactions and payments between banks worldwide. SWIFT is not a bank, rather it is a messaging system for international payments, connecting more than 11,000 financial institutions worldwide, including the US Federal Reserve System, the Bank of England and the European Central Bank. Moreover, western countries are also mulling to slap sanctions on Russian leaders.
These actions are expected to have far reaching impacts on the global economy. For further details, The Express Tribune reached out to experts in a bid to gauge the actual fallout of the war.
Jamil Ahmed, a foreign financial and commodities analyst, stated that just when the world began recovering from the adverse impacts of Covid-19, a devastating invasion takes place. “This will further exacerbate the problems caused by Covid-19 such as supply chain problems,” he said. “The global supply chain was no closer to normalisation and the conflict will accelerate the issue. If you notice, a lot of European supplies particularly the weaponry is on its way to Ukraine.”
At such a time, if some other nation also enters war, it would not receive much help because many countries are helping Ukraine past their capacities. Hence the global economy is on the brink of devastation.
He highlighted that just on the first day of attack, oil price surpassed the much anticipated value of $100 and rose to as high as $105 per barrel while global stock markets staged a sharp rout. While this might seem like just two countries fighting each other, the financial impact of the war has already spilled over to almost all parts of the world. “We are watching roller coaster trends in the currency markets just by the talks of sanctions and same goes for commodity markets, equity markets and safe haven assets,” he said.
Sanctions unveiled so far would hit Russian banks’ business in dollars, euros, pounds and yen. US export curbs will restrict Russian access to electronics and computers while European capitals are fine-tuning similar export controls and measures to target the energy and transport sectors.
According to Ahmed, this would not just only hit Russia although Moscow would be the struck the hardest. He added that initially, not a lot of countries were in favour of penalizing Russia due to vested interests but following massive pressure, they had little choice to impose their own decisions. Finally, the basket of nations that slapped sanctions has now widened to a lot of powerful nations.
“Despite the sanctions, it is pertinent to note that so far, no penalties have been imposed on exchange of energy commodities,” he said. “So one can gauge the extent of the politics going on in terms of sanctions on Russia. Countries are quick to penalise the financial system but energy commodities, which earn hefty foreign exchange for Moscow, were spared.”
He was of the view that business interests of nations were clearly noticeable amid imposition of sanctions.
Germany turned out to be the last country to give a nod to ban on SWIFT for Russia because its energy imports could be jeopardised.
“When Germany announced to close its nuclear plants and stop generating energy from them, it inked numerous deals with Moscow to support its energy needs and up till now, the deals proved to be helpful,” he said. “Now that Germany has decided to move against Russia, it might have to prolong energy generation through nuclear means because at some point, Russia will retaliate and it would do so by halting the trade of energy products.”
Now moving on to Ukraine, the country is a major exporter of food products and ofcourse the war will destroy its produce and limit and capacity to exports, he said adding that due to this, the global food prices were expected to jump as well.
Food inflation is already hammering a number of economies and with food shipments from Ukraine halted, food insecurity and malnourishment will increase.
“In fact, a few nations already fear that Ukrainian companies will cancel export orders and with the given scenario, that seems pretty plausible,” he said. “The only industry which benefits in war is the defence industry and only these stakeholders are looking forward to sharp growth.”
Moreover, as European countries enhance their military aids and raise defence support to Ukraine, it means that they have to cut other many other expenditures so ultimately, the entire European economy would suffer due to the geopolitical threat.
He added that no doubt Europe was at the threat of war but countries had begun to suffer days after Russia launched its first strike on Ukraine.
Human cost to economy
Moreover, there will be a human cost of the war as well, he said remarking that this angle is often neglected when talking about the economy but it should be kept in mind, he said.
“As we see that civilians in Ukraine are fighting out on the streets, there will be casualties or lifelong injuries,” he lamented. “On one hand, the people who are part of the labour force would be killed in explosions or firings and other the other, a lot of people will become disabled thus making them a liability on the state than an asset.”
According to him, it would raise the cost of healthcare for the nation and erode its resources. He stressed that war comes with many unseen expenses like cost of clearing the rubble, relocating the citizens, providing shelter to affected public and rationing of food.
Moreover, he added that in such situation, foreign companies close their offices and divest their stakes in local countries thus rendering massive amount of people jobless. Rising hopelessness drives a small chunk of affectees towards suicide as well.
“In addition, nearly 90-95% of traders (importers and exporters both) are on the edge of losing their jobs in Ukraine,” he said. “It is clear that a lot of trade to and from Ukraine would face disruption so stakeholders are at a massive risk.”
Refugee problem from an economic angle
Finally, the conflict has triggered a new wave of refugee crisis all over Europe.
Talking about the refugee problem from an economic point of view, he added that this is one devastating consequence of war that drags all its victims in to the lower class.
Even someone hailing from an elite family can become a refugee and lose all the wealth, he said.
“These are the people hailing from all walks of life, some are studying, some are employed, some are kids and this, according to me, is the biggest consequence of war besides the loss of lives,” he said. “Buildings can be repaired, roads can be rebuilt but the trauma of refugees cannot be reversed.”
All this has a grave impact on their brains and few can lose their sanity. This can have a massive economic impact as the same person could have proven beneficial for his own country but due to war, he is unable to play his part.
Furthermore, the refugees also become a burden on their host countries because initially, they are people who need support therefore the host countries have to allocate a hefty budget on their housing, food, medical expenses and others, the analyst said.
Therapy for the refugees consumes a huge amount of money. He detailed that which ever countries are taking in refugees, have to allot additional budgets for them for the next few years in a bid to support them.
“First of all, the refugees are allotted a specific place and they are limited to the borders of that area,” he noted. “They can live in that area but since it is a new country for them, they are reluctant to leave it and some countries also stop refugees from exiting the allotted area.”
On the flipside, other countries are also rushing to lift their people out of Ukraine. They are forced to allocate hefty budgets for it and besides, the families are suffering as well.
The bordering nations are sending buses to bring their nationals bank but the far off nations are left with no option but to send planes. Just one such round trip can cost thousands of dollars therefore this is a crisis like no other.
“When the war ends, these countries are left with almost nothing so they have to take aid from international multilateral institutions such as International Monetary Fund or the World Bank,” he said. “Imagine a prospering country approaching such lenders for hefty financing. This is just one aspect of the devastation of war.”
The World Bank is already working on approval of $350 million loan for Ukraine to provide emergency cash for its efforts to defend against Russia's invasion.
Moreover, IMF is also mulling to give aid to Ukraine upon its request for emergency financing.
Most nations lose important infrastructure and have to rebuild from scratch, he said.
What is event more ironic, is that no foreign investor is ready to pour money in the countries so they face global isolation. It takes many decades before such nations are able to fetch foreign investment and by that time, many fall into unsustainable abyss of debt. To fund this debt, they need to borrow further.
Another angle of the refugee problem is that they are unwilling to return to their home countries when they are being rebuilt so public of the country is also reluctant to take part in its rebuilding because they have jobs in their host countries.
Agricultural land is also degraded by rampant strikes therefore if the agricultural land of Ukraine is struck by bombs or missiles, it will lose its fertility, he cautioned.
Similarly, the industrial sector can also witness grave damage and expensive equipment might be rendered useless.
Ukraine has a thriving mining sector and just one single strike can level an entire mine. In such an event, prolonged efforts need to be made to revive the mining industry, he said.
“All in all, war is sheer devastation of global economy and while many people just consider the human impact, there is a massive economic and geo political impact as well,” he concluded.
Comments by multilateral lenders
In a statement, IMF Managing Director Kristalina Georgieva said that IMF was exploring all options to aid the war-torn country.
“Beyond Ukraine, the repercussions of the conflict pose significant economic risks in the region and around the world,” she said. “We are assessing the potential implications, including for the functioning of the financial system, commodity markets, and the direct impact on countries with economic ties to the region.”
We stand ready to support our members as needed, in close coordination with our international partners, she said.
World Bank President David Malpass said that the lender stood ready to provide immediate support to Ukraine and are preparing options for such support, including fast-disbursing financing.
Alongside development partners, the World Bank Group will use all our financing and technical support tools for rapid response.
The World Bank Group is also in active dialogue to support neighboring countries and people that may be affected by this conflict and will make additional resources available, he said.
European Central Bank President Christine Legarde said that ECB was closely monitoring the evolving situation. It will conduct a comprehensive assessment of the economic outlook, which will include these latest developments and which will form the basis of its policy meeting on March 10.
“The ECB will ensure smooth liquidity conditions and access of citizens to cash,” she said. “The ECB will implement the sanctions decided by the EU and the European governments.”
The ECB stands ready to take whatever action is needed to fulfill its responsibilities to ensure price stability and financial stability in the euro area.
Impact on Pakistan
Arif Habib Commodities Managing Director and CEO Ahsan Mehanti said that the first and foremost impact on Pakistan would be the hike in commodity price in the country.
“The import volume of commodities from Ukraine to Pakistan, particularly wheat, will be impacted,” he cautioned.
The Pakistan Stream Gas Pipeline (PSGP) project, being construction between Russia and Pakistan is likely to be condemned by the western world and has to be pursued due to war, he cited.
Talking about the pressure on Islamabad to slap sanctions on Russia, he said that the country’s oil and gas contracts would be gravely impacted.
“The European Union has slapped sanctions on Russia so we naturally cannot ink any new contracts,” he said. “It might have a fallout on the existing oil and gas contracts as well.”
He voiced fear that Pakistan’s wheat import bill was likely to soar by atleast 20%. Following the invasion, wheat prices would climb up globally and Pakistan, that imported hefty wheat last year, is likely to face either food insecurity or jump in food inflation.
Besides, the development has boosted oil prices as well. Western nations are likely to pressureise Pakistan but Islamabad cannot impose sanctions unilaterally and the nation would follow what the rest of subcontinent does.
“If neighbouring countries penalise Russia some way or the other, we will rush to do it as well,” he said. “What we need to know is that our quantum of trade with Russia is not enough for sanctions.”
We cannot ink further oil and gas contracts with Russia
Local currency
Mehanti stated that the impact of geopolitical tensions on rupee was being witnessed everyday.
“Global oil prices rose and Pakistan, being a net importer of oil, will have to pay much higher to buy fuel. Recently, oil price soared past $110,” he said.
Arif Habib Limited Head of Research Tahir Abbas said that oil prices are broadly impacted due to global tensions.
Citing that Russia was the largest oil exporter and a prominent pipeline gas exporter, the upward movement in the two commodities would have a negative impact on Pakistan.
Every $5 rise in per barrel global oil price increases the annual current account deficit by $1.2 billion, he stated.
According to him, oil prices were the biggest victim of the war because Russia was playing a huge role in global oil supply and is an ally of Organisation of the Petroleum Exporting Countries. The alliance is known as OPEC+.
Russia supplies 40% of Europe’s total gas. If Europe stops ordering gas from Russia due to sanctions, the demand for re-gasified liquefied natural gas (RLNG) will rise and it will witness price hikes.
Due to this, Pakistan would have problem in securing spot LNGs.
“Last year, we imported a lot of wheat but we might not need to order that much this year,” he said. “Given that wheat from Ukraine would be scarce or costly, we can import it from other countries.”
“The situation can spell doom for rupee therefore, we hope that it normalises soon,” he said.
Pak-Kuwait Investment Company Head of Research said that inflation reading of Pakistan would be affected because international oil and LNG prices were soaring.
The external account would be pressurised as well and flight to safe haven assets such as gold would rise.