‘Irreconcilable’ war to drag on till 2024, halt progress of globalisation

By Sanjeev Sharma

New Delhi, Feb 18 (SocialNews.XYZ) The economic consequences of the Ukraine war will be long-lasting and will restrict globalisation, GIS Reports said.

Rudolf G Adam, a former vice president of Germany's Federal Intelligence Service wrote in GIS Reports that with irreconcilable war aims between the combatants, the conflict will drag into 2024 and inflict more damage to the global economy and long-standing security arrangements.

Adam said Russia's war against Ukraine will be long, brutal, devastating and exhausting. It offers little prospect of a return to lasting peace. The likely result will be an uneasy truce along a disputed and heavily armed line of demarcation: Neither peace nor war, no winners or losers, no genuine negotiations and no trust in any agreement. Stability will have to come from strong deterrence.

Political priorities are reasserting their primacy over economic calculations. Business leaders will pay more attention to geopolitical risks and opportunities as deep fault lines permeate the globalized world, he added.

A return to protectionism is looming, at least in strategically important sectors. Protecting competitive edges in advanced technologies will become a dominant concern for governments. Securing the availability of vital inputs and protecting intellectual property rights will play a much greater role, he added.

Outside Europe, the Ukraine war's biggest ramifications are economic. Financial jitters triggered by the invasion and announcement of sanctions roiled markets that COVID-19 had already shaken, International Crisis Group said in a report.

Food and fuel commodity prices shot up, sparking a cost of living crisis. Though prices have since come down, inflation remains rampant, magnifying debt problems. The pandemic and economic crisis are two among several mutually reinforcing threats, notably also including climate change and food insecurity, that can beset vulnerable countries and fuel unrest. On this year's list, Pakistan is a prime example. Many countries are in similar boats, the report said.

India's Economic Survey for 2022-23 noted that in general, global economic shocks in the past were severe but spaced out in time. This changed in the third decade of this millennium. At least three shocks have hit the global economy since 2020. It all started with the pandemic-induced contraction of the global output, followed by the Russian-Ukraine conflict leading to a worldwide surge in inflation. Then, the central banks across economies led by the Federal Reserve responded with synchronised policy rate hikes to curb inflation.

Global economic recovery was well on track until the Russia-Ukraine conflict broke out in February 2022. The conflict has now continued for almost a year, disrupting the restoration of the supply chains disrupted earlier by lockdowns and limited trade traffic, the Survey said.

In the last eleven months, the world economy has faced almost as many disruptions as caused by the pandemic in two years. The conflict caused the prices of critical commodities such as crude oil, natural gas, fertilisers, and wheat to soar. This strengthened the inflationary pressures that the global economic recovery had triggered, backed by massive fiscal stimuli and ultra-accommodative monetary policies undertaken to limit the output contraction in 2020.

Inflation in Advanced Economies (AEs), which accounted for most of the global fiscal expansion and monetary easing, breached historical highs. Rising commodity prices also led to higher inflation in the Emerging Market Economies (EMEs), which otherwise were in the lower inflation zone by virtue of their governments undertaking a calibrated fiscal stimulus to address output contraction in 2020, the Economic Survey said.

On the external front, risks to the current account balance stem from multiple sources. While commodity prices have retreated from record highs, they are still above pre-conflict levels. Strong domestic demand amidst high commodity prices will raise India's total import State of the Economy 2022-23: Recovery Complete 23 bill and contribute to unfavourable developments in the current account balance. These may be exacerbated by plateauing export growth on account of slackening global demand. Should the current account deficit widen further, the currency may come under depreciation pressure, the Survey said.

The Covid-19 pandemic is another shock to global growth performance, with economic growth down to a negative of 3.8 per cent in 2020. The following two years saw inflation rates rise to multi-decade highs, fuelled by global commodity and food price spikes. The situation has been further amplified by the Russia-Ukraine conflict. To stem the situation, monetary authorities in advanced economies, especially the US Federal Reserve (US Fed), are accelerating the pace of monetary policy normalisation.

Interest rates and prices of risk assets have been extremely volatile since April 2022, reflecting heightened uncertainty about the economic and policy outlook, exacerbated by low liquidity. The US dollar appreciated sharply against currencies of Emerging Market Economies and major advanced economies facing high borrowing costs. Thus, global financial conditions have considerably tightened especially since April 2022, and the balance of risks is significantly skewed to the downside, thereby weakening the global economic outlook. Global growth is forecast to slow from 6.0 per cent in 2021 to 3.2 per cent in 2022 and 2.7 per cent in 2023 according to the International Monetary Fund (IMF). This is the weakest growth profile since 2001 except for the global financial crisis and the acute phase of the pandemic, the Economic Survey said.

Overall, the adverse global economic situation placed India's BoP under pressure in 2022. While the impact of a sharp rise in oil prices was discernible in the widening of the CAD, policy tightening by the US Fed and the strengthening of the US dollar led to FPI outflows. As a result, as the net financial inflows fell short of the CAD, there was a depletion of foreign exchange reserves on a BoP basis to the tune of US$ 25.8 billion in H1FY23 in contrast to an accretion of US$ 63.1 billion in H1FY22. But huge valuation losses (US$ 48.9 billion) contributed to the net depletion of US$ 74.6 billion of reserves in nominal terms during the period. India's foreign exchange reserves stood at US$ 532.7 billion as of end-September 2022, covering 8.8 months of imports. The reserves augmented to US$ 562.7 billion as of end December 2022 covering 9.3 months of imports. As of end-November 2022, India was the sixth largest foreign exchange reserves holder in the world according to data compiled by the IMF, the Survey said.

Russia intends to shift the exports of its oil and petroleum products to 'friendly' countries this year, increasing their share in total supplies shipped abroad to 75-80%, Russian Deputy Prime Minister Aleksandr Novak has revealed. The deputy PM also noted that last year, in order to reorient Russian oil supply to friendly countries, a project was implemented to increase transportation via the major eastern port of Kozmino. As a result, deliveries to the countries in the Asia-Pacific region rose to 42 million tons per year, RT reported.

Moscow has been diversifying its energy supplies in response to Western sanctions. The EU's ban on Russian refined petroleum products, which came into force on February 5, set a price limit of $100 per barrel for diesel, jet fuel, and gasoline from Russia, and a $45-per-barrel cap for other oil products that trade below the crude price, such as fuel oil used in industry.

(Sanjeev Sharma can be reached at Sanjeev.s@ians.in)

Source: IANS