Login / Register
Vladimir Putin launched a lightning offensive against Ukraine in the early hours of 24 February. The weeks of diplomatic negotiations were in vain. His plan was obviously pre-determined, as this declaration of war may have been recorded a few days earlier in parallel with the announcement of the rupture of the Minsk Agreement. Russia's invasion was unanimously condemned by almost all states and reshuffles the cards of the geopolitical and economic balance.
Economic sanctions against Russia
The response of western countries to the invasion of Ukraine – a candidate for NATO membership – was swift. They will not be fighting with troops on the ground, but rather with economic sanctions. Although some cracks are appearing in relation to the retaliatory measures that are to be adopted, the US, European Union and United Kingdom have all opted for a gradual response. For the time being, Russia will not be excluded from the SWIFT payment system, which would cut its economy off from a large part of the world. But the threat is looming. In the meantime, measures have been taken to cut off Russia’s access to economic financing, deprive its industry of basic goods and technologies, and place sanctions on its apparatchiks and oligarchs. While Russia has launched a rapid military offensive to topple the Ukrainian government, the West’s combat is focused on the economic front and represents a long-term strategy.
Energy and commodity shortages create stronger inflationary pressures
This conflict has serious economic consequences. Firstly, it will be inflationary, since Russia and Ukraine are major producers of energy and commodities: gas, oil and industrial metals in the case of Russia, and agricultural commodities for Ukraine. So on top of the inflationary overhang from the COVID-19 pandemic, there is now the risk of inflation driven by supply shortages that is likely to make forthcoming central bank decisions harder to predict. This is especially the case for the ECB, which is facing divergent inflationary pressures: inflation is higher in countries in the east of the EU, and the impact of this crisis risks exacerbating this further since these countries are more dependent on Russian oil and gas for their energy.
In terms of growth, the Russian and Ukrainian economies represent less than 2% of global GDP. But the risk of the conflict dragging on brings the threat of a new crisis of confidence after two years of weathering wave after wave of COVID-19. The Kremlin has lost the first battle on the financial markets. After 36 hours of conflict, Moscow’s flagship index has lost close to a quarter of its value, while European indices are down just 1% over the same period.
The world is off its rails
From a geopolitical perspective, this conflict is likely to create a new global order. Since the US debacle in Kabul, Uncle Sam seems unwilling to play the role of the world’s policeman. We are moving towards two regional blocks, with a US/Europe Atlantic block in the West, and a China/Russia axis in the East, which may have expansionary designs on other former Soviet Republics. And Beijing could be tempted to expand its influence in the South China Sea region, starting with Taiwan. Historically, the European Union has grown stronger during times of crisis. This is likely to be the case on the military front this time. Having constructed the foundations of fiscal solidarity during the pandemic, we could see the beginnings of a more powerful and better coordinated continental force emerge from this military conflict.
Written on 25.2.22 by Olivier de Berranger, CIO, LFDE