February & March 2022

  • 1 February - 31 March 2022

Repercussions of the Ukrainian War...

Between Containing Inflation and Supporting Economic Recovery?!

Amid the continuation of the Russian-Ukrainian war, which NATO countries faced by imposing severe sanctions on Russia that exceeded 5,500 penalties, which included most of Moscow’s commercial activities except for the flow of oil and gas to Europe, as about 70 percent of the Russian gas exported to Europe, as well as about 25 percent of its oil exports, their revenues represent about 42 percent of the Russian treasury resources, in addition to the large exports of minerals and food commodities such as wheat and grain in general to the European and American markets. But is the contraction in Russia's economy the only one that will result from these sanctions, which is expected to reach about 15 percent, according to some Western estimates?

In fact, the economy of Europe, America, and the world will not escape the impact of this crisis, as energy prices have exceeded record levels and global production costs have risen, as well as transportation and insurance, and a lack of supplies of goods in general, especially food, given that Russia and Ukraine export about 29 percent of the world’s imports of wheat and some grains. The crisis will play a role in exacerbating the problem of high inflation, which reached the levels it was four decades ago, and the central banks, led by the US Federal Reserve, began to take strict policies to confront inflation, such as raising interest rates and getting rid of the quantitative easing program and thinking about raising interest rates further between 4 to 6 times this year. But the hint of the possibility of raising it by half a basis point, which if happened, it would be for the first time in many years. Which indicates the difficulty of what is facing the central banks of major countries, especially America, in overcoming the repercussions of this complex crisis, especially as it comes while the repercussions of the Corona pandemic are still on the chest of the global economy, where the problem of supply chains is still present, which raised inflation rates by large rates before the crisis of Russia with Ukraine.

It may not be possible to mention all the indicators that began to indicate the risk of an inflationary stagnation because commodity prices are rising, while expectations have begun to change to reduce economic growth rates. The risk of falling into this kind of recession will make it more difficult to return to the growth rates that the world has recently reached, after it has spent 30 trillion dollars since the Corona pandemic began in 2020.

If we look beyond the global repercussions, the countries that will feel the most pressure are those that have direct trade and tourism relationships and financial exposure. As for the economies that depend on oil imports, they will record higher rates of deficit in public finance and trade and will witness greater inflationary pressures, although higher prices may benefit some oil-exporting countries such as countries in the Middle East and Africa.

Severe food and fuel prices would drive greater risks of unrest in some regions, from sub-Saharan Africa and Latin America to the Caucasus and Central Asia, while food insecurity is likely to increase in some parts of Africa and the Middle East.

In the longer term, the war, with a clear warning from the International Monetary Fund, could fundamentally alter the global economic and geopolitical system if energy trade shifts, supply chains are reconfigured, payment networks are fragmented, and countries rethink their reserve currency holdings. Increasing geopolitical tensions threatens to increase the risks of economic fragmentation, particularly at the level of trade and technology.

The Arab region is likely to face severe successive effects from rising food and energy prices and tight global financial conditions. Policies to contain inflation, such as increasing government subsidies, will put pressure on already weak fiscal accounts. In addition, worsening external financial conditions may stimulate capital outflows and add to the adverse effects on growth in countries with high debt levels and large financing needs.

In short, the consequences of the war launched by Russia against Ukraine did not only shake up these two particular countries, but also affected the Arab region and the world at large. It also indicates the importance and existence of a global safety net and the establishment of regional arrangements to protect economies from shocks. The full picture of some of the effects may not be clear for many years, but there are already clear signs that the war and the resulting jump in the costs of essential commodities will make it more difficult for policymakers in some countries to strike the delicate balance between containing inflation and supporting economic recovery.

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