BONN, Germany — Growing fears of a global economic slowdown are complicating Western allies’ financial campaign against Russia, as world leaders struggle to craft new punishments for Moscow without compounding inflation and other domestic challenges.
Already, experts say, the war has sent the cost of food skyward, which risks sparking a hunger crisis in parts of the developing world. Energy prices have also soared both in Europe and the United States — despite President Biden’s move to release an enormous amount of the nation’s oil reserves — in an added strain on consumers facing the highest rates of inflation in four decades. The British government on Wednesday reported that prices in April were up 9 percent from one year ago, outpacing inflation even in the United States.
Asked by reporters on Wednesday about global economic risks, Treasury Secretary Janet L. Yellen emphasized the importance of ensuring the sanctions inflict the “maximum” impact on Russia while trying to “minimize spillovers to ourselves.” She said balancing this tension “is always the core of the conversations that we’ve had,” both for energy and other related sanctions.
“Many of the discussions we have had … as we continue to put sanctions in place will be about how best to design them to shield the global economy from the adverse effects, while imposing maximum harm on Russia and [President Vladimir] Putin,” Yellen said ahead of meetings of the finance ministers of the Group of Seven, a coalition of powerful Western nations.
Some Western leaders want to go much further to choke Russia off from the global economy by depriving it of its substantial quantities of international oil and gas sales. But there may be limits to how much economic pain voters are willing to tolerate.
The European Union on Monday slashed its economic forecast because of the war in Ukraine and warned that the fallout from the fighting could make things significantly worse. “An escalation of the war, a sudden stop of energy deliveries, or a further deceleration of economic activity in the U.S. and China, could result in a much grimmer outlook,” the European Commission warned.
The extent of the existing U.S. and European sanctions on Russia over the war remain extraordinary, with Western powers targeting the Kremlin’s central bank reserves, financial elites tied to Putin, and key sectors of the country’s economy, including its defense base and banking industry, among other measures few predicted at the war’s outset. The Institute of International Finance has estimated that Russia’s economy could shrink by as much as 15 percent this year alone. The finance ministers of the G-7 nations, meeting in Germany, are also expected to announce an economic aid package to Ukraine this week.
But even as the E.U. has worked with the United States and other allies to target Moscow, it has continued to buy Russian fossil fuels, keeping money flowing to Moscow. Some, including Baltic nations and some other Eastern European countries, have pushed hard for a full and immediate embargo. Others have resisted, worried about the economic consequences.
In April, the bloc agreed to phase out coal, but it remains stuck on oil and gas. On May 4, after weeks of deliberation, the European Commission proposed a plan to phase out imports of oil from Russia. It included extensions for two countries — Hungary and Slovakia — that remain heavily dependent on imports, according to E.U. diplomats. But in the two weeks since, E.U. countries have not approved the deal, as other countries pressed for extensions and Hungary pushed for more money to upgrade its oil infrastructure.
The European Commission on Wednesday also released its RePowerEU agenda, a plan designed to move Europe away from dependence on Russian oil by reducing energy demand and intensifying production of renewable energy. European Commission Executive Vice President Frans Timmermans said if enacted in full, the plan would cut dependence on Russian gas imports by one-third this year and to zero by 2027, but questions abound about its implementation.
Some experts point out that the Americans and Europeans have moved swiftly to punish Russia even at risk to their own economies, in addition to mobilizing tens of billions in international economic assistance for Ukraine.
“I believe that Europe will on the whole stand firm with the Biden administration in developing and applying sanctions against Russia for its barbaric war on Ukraine,” said Mark Sobel, who previously served as deputy assistant secretary for international monetary and financial policy at the Treasury Department.
But Ukrainians are still urging swifter actions. “We are waging a war against Russia. We are losing people everyday. We need economic support and sanctions pressure because we have limits to our resistance and our resilience,” said Igor Burakovsky, professor at the Institute for Economic Research and Policy Consulting, a Ukrainian think tank.
Josep Borrell, the E.U.’s foreign policy chief, acknowledged to reporters on Tuesday that the war could lead to commodity price increases in many countries, but he said Europe would have to adapt to new circumstances.
“All our partners consider and feel the direct impact Russia’s war is causing around the world. I said before — on energy prices, on food shortages and inflation,” Borrell said. “Unhappily, all these things together will bring the world to the edge of another recession whatever they do. We will have to adapt our financial support in line with these new needs.”
The oil proposal now on the table for E.U. nations does not include any measures on Russian gas, where there is even greater disagreement among member states.
In recent days, the bloc also appeared to soften its tone on whether E.U. countries can continue to buy Russian gas without violating sanctions, paving the way for European countries to keep buying despite the bloc’s bellicose rhetoric about the war.
Finding a way for companies to keep gas flowing could help avoid a confrontation with Russia as the next round of bills come due. In April, Russia’s state-controlled gas company, Gazprom, shut off the supply of natural gas to Poland and Bulgaria when they refused a Kremlin demand to pay in rubles — and threatened more cutoffs to come.
U.S. allies have been slow to embrace a push to try to cap the cost of Russian energy, though global financial leaders were expected to discuss the idea at the conference in Germany of the G-7 countries. Treasury officials recently raised with the Europeans ideas for imposing price mechanisms that could be paired with their commitment to ban Russian energy after an initial period, according to one person familiar with the matter, who spoke on the condition of anonymity to describe private conversations. But that plan has been discussed for weeks and has to up to this point gained little traction.
Rauhala reported from Brussels.