The world’s largest shipping companies have suspended shipments to and from Russia as they try to work through the implications of the financial sanctions and export controls the West has imposed. That’s adding a new layer of disruption and costs to global supply chains that were only just beginning to recover from the pandemic.
The war is likely to further hit shipping and supply chain shortages.Credit:Getty Images
The oil price soared despite oil’s exclusion from the sanctions. Companies and traders are concerned about the impact on Russian banks and companies’ stability,whether the financing/trading of oil might be inadvertently caught up in the sanctions and,most significantly,whether Russia either weaponises its energy exports and cuts off supply to Europe or the West accepts the self-harm and sanctions Russian energy to hit Russia where it hurts most.
Before the invasion central banks were being challenged by the highest inflation rates in 40 years against the backdrop of surprisingly strong economic rebounds from the pandemic – rebounds powered by the extraordinary fiscal and monetary response to the outbreak of COVID-19.
In the US as many as seven 25 basis point increases in the federal funds rate this year were priced into the US bond market and the Fed was expected to start shrinking its balance sheet by not replacing some of the $US5 trillion ($6.9 trillion) or so of assets it purchased during the pandemic as they mature.
The ECB was expected to raise rates twice towards the end of the year,shifting its policy rate from minus 0.5 per cent to zero.
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Those expectations have changed. At least two of the Fed rate rises have now disappeared from market calculations and trading in European government bonds is signaling minimal,if any,change to ECB rates.
In the US bond yields that were rising quite sharply have fallen abruptly,with the yields on both two-year notes and 10-year bonds slumping by around 30 basis points within the past week. In Germany,the yield on 10-year bunds,which had pushed into positive territory in January for the first time in three years,has dropped back below zero in the past few days.
Conventionally,given the degree of disruption and range of uncertainties occurring within the global financial system and economy because of the sanctions,the Fed and ECB would hose their markets with liquidity to ensure there are no unintended consequences within the plumbing of their financial systems.
The extent of inflation within their economies – 7.5 per cent in the US and 5.6 per cent in Europe – handcuffs them. More ultra-cheap liquidity would only fuel more inflation.
It also complicates how they respond to the economic effects of the invasion and sanctions.
Russia’s role as the world’s third largest oil producer,the significance of the combination of Ukraine and Russia to grain markets – nearly 30 per cent of all wheat exports,75 per cent of global sunflower oil exports and key exporters of corn – and Russia’s importance in markets for metals like aluminium,nickel,palladium and titanium is causing sharp rises in the prices of all those commodities.
The invasion will cause the central banks to rethink the courses of their policies for the rest of this year.
Thus the flow-on effects from the invasion will add more inflationary pressures to already-unsustainable inflation rates.
Higher oil and other commodity prices - especially higher oil prices - are,however,growth suppressants. They will slow global economic growth.
The world’s central banks face the spectre of continuing high inflation rates and an abrupt slowing of economic growth. That was the combination that produced stagflation during the OPEC oil embargo in the 1970s.
Whether we get stagflation – high inflation and no economic growth – or just a slowing of growth while inflation rates remain high,the invasion will cause the central banks to rethink the courses of their policies for the rest of this year.
The threat of stagflation is unlikely to change the direction of monetary policies,given how elevated inflation rates were even before the invasion,but will probably change their pace. Fewer rate rises and a more cautious approach to quantitative tightening are probable.
Getting those settings right will be a difficult and delicate task,one made more complicated and even dangerous by the volatility and unpredictability of what might occur inside and outside Ukraine.
What’s obvious is that the assault on Ukraine is a tragedy for its people,faced with displacement and losses of lives,livelihoods and freedoms. It is also causing a financial and economic crisis for Russia,particularly its ordinary citizens,while threatening lost growth and living standards,at the very least,for the rest of the world.