With no sign of an early end to the war in Ukraine, the risk is growing that the conflict will tip a fragile global economy into a slump.
U.S. and allied financial sanctions designed to punish Moscow have put a chokehold on the Russian economy, sparking an exodus by hundreds of multinational companies and pushing the government to the brink of its first default on foreign-currency debt since the Bolshevik Revolution.
With U.S. and NATO officials warning that the fighting in Ukraine could continue for months or even years, a greater economic toll looms.
On Tuesday, the World Trade Organization slashed this year’s growth forecast to 2.8 percent from 4.1 percent before the war, saying the conflict had inflicted “a severe blow” on the world economy.
Gregory Daco, chief economist for Ernst & Young, said a lengthy war — and a further increase of allied sanctions on Russia — could strip up to two percentage points off global growth.
Wall Street economists expect the global economy to expand by 3.5 percent this year, according to an April survey by Bloomberg, down from 4 percent in March.
“The longer this situation goes on, the more significant the erosion becomes,” Daco said.
Despite Moscow’s repeated threats earlier this year to act against Kyiv, the Feb. 24 invasion surprised government leaders, business executives and economists who had expected 2022 to be a year of recovery from the coronavirus pandemic. Instead, they find themselves grappling with a major European conflict that appears likely to be protracted.
Army Gen. Mark A. Milley, the chairman of the Joint Chiefs of Staff, told Congress this month that combat in Ukraine would be “measured in years.” NATO chief Jens Stoltenberg and White House national security adviser Jake Sullivan have offered similar comments in recent days.
As worries mount about the war’s economic consequences, combat in Ukraine is expected to intensify. Russian forces are massing for an anticipated assault in eastern Ukraine, where pro-Russian separatists have battled Ukrainian government forces for several years.
On Sunday, the World Bank warned that “the war has added to mounting concerns about a sharp global slowdown.”
The battlefield overlaps with some of the globe’s most important cropland. Ukraine and Russia combined account for one-quarter of world wheat exports, according to the World Bank.
Protracted fighting in Ukraine could interrupt the annual cycle of sowing and reaping on Ukrainian farms, disrupting the global food trade beyond the end of 2022. Already, at least 20 percent of Ukraine’s planted wheat “may not be harvested due to direct destruction, constrained access or a lack of resources to harvest crops,” the U.N. Food and Agriculture Organization said last week.
The U.N. agency cut its forecast for the global cereals trade to 469 million tons, down 14.6 million tons from its March estimate, citing the interruption of exports from Ukraine and Russia. Lower trade volumes will crimp food imports across much of the Middle East and North Africa, raising concerns over hunger and political instability.
The war’s impact comes as the global economy’s two main engines — the United States and China — confront their own problems. China’s zero-tolerance coronavirus policy is upending supply chains and raising doubts about the government’s 5.5 percent growth target.
In the United States, the Federal Reserve is struggling to cool off the highest inflation in 40 years. By driving up oil prices and consumers’ expectations of price increases, the war is making it more likely that the Fed will aggressively hike rates, increasing recession risks, said Mark Zandi, chief economist of Moody’s Analytics.
“The fallout of the Russian invasion on the U.S. economy has become meaningfully more problematic,” Zandi wrote in a note to clients on Monday.
The war and subsequent sanctions also have done unexpected damage to global trade flows. Russia and Ukraine together account for less than 3 percent of global exports. But the hostilities have complicated supply chains by raising shipping and insurance costs in the Black Sea region, according to a new World Bank study of the war’s effects.
After more than two years of chronic supply chain havoc, the war has become one more headache for the automotive, petrochemicals, agricultural and construction industries, the bank said.
Another casualty of the war could be the body that coordinates the global response to major downturns, the Group of 20 nations. Treasury Secretary Janet L. Yellen last week said Russia should be expelled from the G-20 over its invasion of Ukraine, adding that the United States would boycott the organization’s meetings if Russian officials attended.
Indonesia, which is hosting this year’s summit, has said Russia remains welcome.
The first test of the U.S. stance could come on April 20, when G-20 finance ministers and central bank officials are scheduled to gather in Washington. Along with the United States, the group includes the European Union, Canada, Japan, China, and developing countries such as Brazil and South Africa.
“Since the 2008 financial crisis, the G-20 has been the most important stabilizing force in the global economy,” said Josh Lipsky, director of the Atlantic Council’s GeoEconomics Center. “It’s a very important coordinating body.”
Russia has largely weathered the sanctions’ initial effects, with the ruble rebounding from its initial 40 percent plunge to nearly regain its prewar value, helped by the imposition of controls on the movement of funds in and out of Russia. The Russian central bank last week dropped its main interest rate to 17 percent after doubling it to 20 percent to defend the ruble.
The cut suggests Russian authorities feel they can afford to lower their defenses around the ruble and make credit more affordable so that companies can invest and hire.
“They’ve managed to put out the first fires — the bank runs and potential collapse of the financial system. Now, they’re switching to support growth,” said Elina Ribakova, deputy chief economist for the Institute of International Finance. “But there is only so much the central bank can do.”
Indeed, the country is headed for a deep downturn and cracks are appearing in its financial foundation. S&P Global Ratings late Friday said the Russian government was in “selective default” on its U.S. dollar-denominated bonds after making interest and principal payments on April 4 in rubles.
The Treasury Department — in a tightening of U.S. sanctions — blocked U.S. banks from receiving a dollar payment from Russia. The department initially said U.S. investors could accept dollar payments on Russian debt until May 25.
Russian Finance Minister Anton Siluanov told the Russian newspaper Izvestia that his government will not issue any new bonds this year, fearing the required interest rate would be “cosmic,” and planned legal action if forced into default.
S&P said it did not expect the Russian government to meet its payment obligations within the 30-day grace period because “sanctions on Russia are likely to be further increased.”
As the war grinds on, reports of atrocities by Russian soldiers are drawing calls for a tougher allied response.
Europe’s payments for Russian energy products represent a lifeline for Russian President Vladimir Putin, replenishing the hard currency reserves that sanctions squeezed.
Reflecting soaring oil and gas prices, Russia’s central bank said Monday that the surplus in the country’s account — the broadest trade measure — rose to $58.2 billion in the first quarter. That was the largest figure since 1994, and more than twice the $22.5 billion reported in the same period last year.
E.U. officials are meeting today to discuss potential steps to reduce the financial flows to Moscow, even as Germany and other nations that are heavily dependent upon Russia for energy remain reluctant. About half of Russia’s 6 million barrels per day of oil exports last year went to Europe.
“We have imposed massive sanctions already but more needs to be done on the energy sector, incl oil,” Josep Borrell, the E.U.’s top diplomat, tweeted over the weekend.
Any initial move would probably involve a phased reduction in purchases from Russia, according to Daniel Tannebaum, a partner at Oliver Wyman in New York, who advises financial institutions on sanctions.