Russian wheat fields. Both Russia and its neighbor Ukraine were major wheat exporters. Photo: DTN

It is hard to imagine, but the pandemic wasn’t the worst thing that could have ever happened to the world. Since Vladimir Putin gave the order to launch a military operation in Ukraine, almost no one has talked about the infection rate or how many people were hospitalized by Covid-19. The reason is very simple: a coronavirus is far less lethal than bullets fired from a handgun.

Price of war is too high

Hardly anyone can disagree that military conflict brings nothing but human and economic costs. Nevertheless, as the British prime minister Neville Chamberlain said in the 1930s, war is a lose-lose proposition even though a “victor” may emerge from the ashes in the end.

As of now, Western countries are doing their utmost to stop the deadly conflict in Ukraine. As a result, Russia could face a reduction in financial flexibility, slowing GDP growth, and a sharp loss of confidence in the domestic economy.

Tighter sanctions will also reduce the ability of the private sector to refinance its foreign debt. In addition, the Russian budget will be negatively affected by the weakening of economic activity and, to a lesser extent, by the direct financial costs of the conflict.

Most probably, Russia will turn to China for its financial needs. Since 2014 the percentage of payments in US dollars between those two countries has fallen from 97% to 33%.

In Ukraine, the economic consequences of the war could be even more substantial. According to the International Monetary Fund, seaports and airports are closed or have been damaged, and many roads and bridges have been damaged or destroyed. The country has already requested emergency financing of US$1.4 billion under the IMF’s Rapid Financing Instrument.

In the meantime, the UK has allocated an additional $100 million directly to the Ukrainian government to mitigate financial pressure.

Global economy will also suffer

According to the first deputy chairman of the Central Bank of Russia, Sergey Aleksashenko, disconnecting the largest Russian banks from the SWIFT system could disrupt commodity flows and consumer markets deficits, and accelerate inflation as natural-resource prices rise.

Over the last three months, the S&P GSCI index, a broad barometer for the prices of global raw materials, has jumped by more than 45%. Russia and Ukraine are major wheat exporters, while Russia and Belarus are big in potash, a component of fertilizers. Thus, unless the world manages to find alternative solutions, inflation will continue to rise.

The tightening of monetary policy on behalf of the central banks could weigh on global economic growth. The worst-case scenario would be so-called stagflation, when high inflation happens during a period of stagnant economic growth.

Igor Kuchma

Igor Kuchma is a financial adviser who is passionate about economy and the capital markets in general. He has experience working with Russian, Spanish and American financial institutions. He helped to compile a course for the Series 7 exam, while some companies he has prepared investment portfolios and macro and microeconomic models in Excel, and has studied trends and historical data.