Russia avoided default on its foreign debt by paying bondholders $117 million, producing at least a temporary sigh of relief. The ability to pay creditors is just one of the economic impacts of Russia’s invasion of Ukraine. More broadly, the repercussions include a drag on a global economy already struggling to emerge from the Covid-19 pandemic; the hit of sanctions; the loss booked by companies withdrawing from Russia; and price spikes in commodities markets.
Supply-chain breakdowns affecting availability of wheat, fertilizer, and other key agricultural products could lead to a humanitarian as well as economic shock. Then there also are the ever-mounting costs of rebuilding once the hostilities stop, the lost productivity, the empty shelves and lost jobs, and exchange-rate shocks.
I won’t belabor the impact on global energy markets, which has been extensively covered. But energy is a significant part of the war’s contribution to already-high inflation, to which the commodities and supply-chain shocks described above will contribute.
The full extent of the economic damage will depend on how much longer the war continues and many other factors. Nevertheless, observers are trying to assess possible scenarios based on what we know now. Here are quick snapshots –by no means exhaustive– of estimates of the extent of the looming economic issues.
Direct Bank Exposure
There are, of course, the default worries. Though the prospect raises the ghosts of Russia’s 1998 default, today’s situation is different. Russia’s hard currency reserves are more than enough to cover its obligations. Sanctions loopholes created will allow Russia to make good on its obligations last through May 25.
“As of last summer, banks headquartered outside Russia had a little more than $100 billion of direct exposure to borrowers in Russia net of risk transfers, plus nearly $50 billion in exposure through derivatives, credit commitments, and guarantees,” Matt Klein wrote in his excellent Substack newsletter, The Overshoot, citing the Bank for International Settlements. This is down sharply from before Russia’s 2014 invasion of Crimea, which prompted many banks to reduce their exposure. In 2013 US, European, and Japanese banks held more than $250 billion in claims net of risk transfers as well as around $200 billion in other exposure. (This includes not just Russian government debt but also corporate debt.)
Russia has more than enough reserves to keep paying on its roughly $62.5 billion in foreign debt, including $21.5 billion that it must pay in dollars and euros.
The recent payment is an encouraging sign that the country wants to continue engaging with global markets and meeting its financial commitments. But the question remains: will it continue to want to do so? It’s also unclear whether Russian leader Vladimir Putin will make good on his threat to pay creditors in devalued rubles, which would mean a default on the terms of the borrowing agreements. Another $2.86 billion is due by April 4, and developments in the conflict could easily change Russia’s stance.
That’s why bankers are already discussing the very real likelihood that some part of Russia’s international obligations will need to be written off.
Global Economic Tremors
A recent JP Morgan research note predicted that the Russian economy would contract by 35% in the first and second quarters of 2022 compared to 2021, and at least 7% for the full year. “Inflation could end the year at around 14%, up from 5.3% forecasted before the crisis, with risks skewed heavily to the upside due to ruble depreciation and import shortages.
Sanctions on Russia, inflation, and market and supply disruptions will cost the global economy as well. JP Morgan revised its global 2022 economic projections March 10 to reflect its estimate that the war will knock 1.5% off of global GDP and add 3% to inflation.
Corporates Withdrawing from Russia
The European civic organization The Good Lobby and Progressive Shopper, which tracks political contributions, have created the Ukraine Corporate Index to track global companies’ stances toward Russia. In response to corporate withdrawals, Russia has published a list of 59 Western companies that could be nationalized, including McDonald’s, Starbucks, EY, Ikea, Volkswagen, Toyota, and Shell.
The impacts on individual companies could be significant —as I noted recently, BP has estimated that it could have to write off as much as $25 billion because of its divestment from Russia could– but in most cases still represent a manageable portion of their overall business.
The 46 countries that enacted sanctions on Russian cars, machinery, chemicals, pharmaceuticals, and other manufactured products had been supplying the country with more than half of its imports of these goods combined. Before these countries imposed sanctions, they had been exporting a combined $139 billion to Russia, according to a Washington Post analysis.
A Global Food Catastrophe
United Nations Secretary-General Antonio Guterres has warned of a “hunger hurricane” because of the war’s impact on fertilizers and agricultural trade. The impact would be particularly hard on North Africa and the Middle East; Egypt, for example, is the world’s biggest wheat importer and relies heavily on both countries. Indonesia is the world’s second largest buyer of Ukrainian wheat. Pakistan, Turkey, and several countries in Central Asia and sub-Saharan Africa depend on Ukrainian and Russian wheat as well.
Similarly, Paul Polman and Eratharin Cousin warn in a recent analysis that a global food catastrophe is looming. In normal times, Russia and Ukraine together produce between 20% and 30% of the world’s wheat, depending on whom you ask and on the harvest in question. They also are major producers of corn, sunflower oil, and barley. They export nutrients such as potash and nitrogen for fertilizer. “While important agricultural goods including seeds and fertilisers are not officially subject to international sanctions, the food value chain is close to collapsing, putting up to 500 million people at risk of ‘collateral hunger’,” Cousin and Polman wrote.
Ukraine typically produces 10% of global wheat exports, 14% of corn exports and about half of the world’s sunflower oil, according to the U.S. Department of Agriculture as cited in The Wall Street Journal [paywall]. Ukraine has already planted the spring wheat harvest but is having trouble getting fertilizers. Harvests of corn, sunflower and barley harvests, which normally happen in April and May, also are endangered. Taras Vysotskyi, Ukraine’s deputy minister of agrarian policy and food, told the Journal that the best-case scenario is that the country’s agricultural exports will fall by a fifth this year compared with 2021, but that a much steeper drop is more likely.
Should Russia and Ukraine completely stop wheat exports, it would result in serious shortages in many developing economies, “The disruption in fertiliser manufacturing risks making these disruptions more long lasting, by putting next years’ agricultural supply under stress,” the OECD, an international organization. reports.
Global supply chains
Russia and Ukraine also export key metals and gases, without which manufacturers elsewhere will have trouble finishing production and getting goods to market. “Russia is a key supplier of palladium, used in catalytic converters for cars, and nickel, used in steel production and the manufacture of batteries,” the OECD notes. “Russia and Ukraine are also sources of inert gases such as argon and neon, used in the production of semiconductors, and large producers of titanium sponge, used in aircraft. Both countries also have globally important reserves of uranium.”
It’s impossible to separate the economic impact from the humanitarian crisis, both the victims of the war and those who will suffer from hunger. Nevertheless, assessing the economic side-effects and finding ways to keep them from creating other tragedies remains important.
This article is part of my LinkedIn newsletter series, “Around My Mind” – a regular walk through the ideas, events, people, and places that kick my synapses into action, sparking sometimes surprising or counter-intuitive connections.
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